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Executives

Steven Bangert – Chairman of the Board and Chief Executive Officer

Jonathan Lorenz – Vice Chairman

Lyne Andrich – Executive Vice President and Chief Financial Officer

Analysts

Ross Haberman – Haberman Funds

Ben Crabtree – Stifel Nicolaus & Company, Inc.

Jason Werner – Howe Barnes Hoefer & Arnett Inc.

Peyton Green – Ftn Midwest Securities Corp.

Bain Slack – Keefe, Bruyette & Woods

CoBiz Financial Inc. (COBZ) Q1 2008 Earnings Call April 25, 2008 11:00 AM ET

Operator

Good morning, my name is Melissa and I will be your conference operator today. At this time I would like to welcome everyone to the CoBiz Financial first quarter 2008 earnings conference call. (Operator Instructions). After the speakers’ remarks there will be a question and answer period. (Operator Instructions) It is now my pleasure to turn this over to your host Steven Bangert, Chairman and CEO. Sir, you may begin your conference.

Steven Bangert

Thank you, Melissa. Well welcome to our first quarter conference call. I want to let everybody know that in the room here I have John Lorenz, the Vice Chairman and CEO of the bank that will have some comments available. I also have Lyne Andrich, our CFO will be for any questions that we might have at the end also.

Last night you probably saw the release, earnings of 7 cents versus 24 cents a year ago. Included in that 7 cents our earnings this quarter was a $5 million provision we previously had announced in our April 14th release.

In addition to the much higher provision which you’ve typically seen our of CoBiz is it is also happened during the first quarter which historically has been a very difficult quarter for us because the seasonality and a number of our different segments. banking is historically down 2 to 3 cents over the fourth quarter of the previous year due to seasonality of their business.

That’s primarily because of slower loan growth in the first quarter and a lot of our customers also dividend money out to themselves from previous years’ earnings in January. So historically the bank does not do as well in the first quarter as it did in the previous fourth quarter and that’s no different this year.

In terms of investment banking, typically are slower in the first quarter also. We will get into that a little bit more because of all three segments so I think it’s as you see as the year progresses it should have quite a bit of momentum and their earnings.

The bank itself, loan growth was at 29 million for the quarter, much slower than usual, but that’s primarily because it’s seasonality. If you look at the previous two quarters we had very robust quarters as far as growth was concerned and so you saw a lot of emptying out of the pipeline. We spoke about that in previous phone calls.

I’m not sure that it necessarily means slow loan growth as you look beyond into the rest of the year. It’s probably too early to forecast the second quarter but we are over $40 million in loan growth in the first 20-some days of April and that. So we’ve already exceeded the quarter and we talked to the Colorado bankers, they’re still seeing an awful lot of activity.

We are seeing some activity down in the Arizona bank also, but any growth that we see down there as far as customers coming to the bank. Hopefully we kind of work through some of the issues we have in Colorado or Arizona. You’ll see some of that offset in the growth that we’re bringing on.

So I think the growth that you would anticipate out of Arizona for the remainder of the year will be muted by or hopefully we’re successful in working or moving our way out of some difficult relationships we have down in the Arizona market. And we’ll speak to those, those really haven’t changed. It’s essentially the same as what we’ve been talking about for the last 90 to 120 days and I’ll let John speak a little bit more about that.

The $5 million provision is primarily related to the economic slowdown in Arizona. What’s interesting to know though is the NPA growth that you saw during the quarter was primarily in Colorado and not Arizona, really free credits.

We believe there’s minimal loss exposure in all three of them. And we should be working our way through the system over the next couple of quarters. However, as that happens we do anticipate some Arizona properties we’ll replace them as we work our way through some of the more difficult projects down there. And I’ll let John kind of expand more upon that when I turn it over to John.

Deposit growth, 11% year-over-year. Not as much growth during the quarter again. But we also there in the quarter had been running off the broker deposits, and so that I think we at the end of the quarter run off around 46 million in broker deposits.

We started the year with around 148 million I believe around broker deposits, ran off around 46 million during the quarter but those are being replaced at much more attractive cost structures for us. Broker deposits is another way we use to fund ourselves over the last few years. Typically only 5 to about 7% of our funding comes from broker deposits.

What we’ve seen though is that the capital market that deteriorated over the last three to four months, that cost is an alternative borrowing source is quite a bit more expensive than other alternative borrowings and so I think you’ll continue to see us replace those deposits with other sources of borrowing such as federal home loan bank borrowings.

The net interest margin came in 20 basis points during the quarter. That was primarily the result of the decrease in the fed fund’s rate. There was also impacted by an unfavorable change in the mix. About 75% of the change or 15 basis points was a result of the decrease in rates and about five basis points as a result of the mix and primarily on the deposit side.

As you saw our demand deposits as a percentage of our overall deposits have come in a little bit during this period of time. We’re watching that closely and that and hoping that stabilize at this point in time. What’s been interesting is right now our customers have been willing to pay the hard charges for some of the cash management services that we’re providing so our fee income has gone up now but they haven’t really been leaving the extra demand deposits.

Now last time when rates came down and stayed down for a period of time , we saw demand deposit balances start to grow and we really didn’t pick up the hard charges like we have this quarter and that. Whether that’s going to happen going forward, I don’t really know and that. But I do think that you should see the spread income kind of hang in there now. I’m mean we’re expecting that with several positive things going on.

We still have a lot of PD that are repricing over the next two or three months. Most of that, we’ve got about$55 million of broker deposits that we replaced as of around March 30th April 2nd and those are all going on about 300 basis points cheaper.

So you didn’t really see that in our first quarter numbers but you should see that in the second quarter numbers and that. We also made another rate reduction in our rates the first week of April. But I think that’s probably doing to be offset by some of the growth that we’re anticipating now and that. And the growth is not going to go on at the 4% levels.

So we think, you know, the savings that we are going to pick up as we aggressively manage our existing deposits and borrowing will be somewhat offset by new growth going on and tighter margins and that. We’re not able to track new money at the same rate we’re able to retain our current money and that.

So we’re going to have to be we’ll be in a little bit more aggressive in order to [inaudible] need to bring deposits in today’s environment and that. As I said, we are anticipating still some pretty good long growth coming out of the Colorado market primarily over the next couple of quarters and that.

Fee income was down by $900,000 from the fourth quarter of ’07. We do have a couple of new acquisitions that we closed on at the end of the year the first part of the year. One was a small property a casualty agency in Arizona. Very profitable agency. Had a good quarter for us. Real strong operating margin. It will be a great addition for us. And a small investment management firm. Very well known here in Colorado market called Wagner Investments. The property casualty agency in Arizona was known as BDA. We’ve renamed it CoBiz Insurance of Arizona and I think both of them will be a nice addition.

But what we did see is slow activity on the investor banking side as well as the wealth transfer group which many of you may remember is really our life insurance produce that we work with high net worth individuals. But both of those are areas that I think you’ll see considerable pickup, even in the second quarter now.

The investment banking group as we mentioned in the press release. We were hoping that at least a couple of deals would have closed during the first quarter. They were supposed to close about midway through the quarter. It’s just very very difficult today to get these deals to the finish line and that. We didn’t get them closed but it was early the first week or so of April, so we already have about 2.6 million in revenue at the investment banking side and that alone is worth probably a 4 cent swing from investment bank from first quarter to second quarter.

We’re still encouraged by their active pipeline of business but we want to be cautious about the impact of a meltdown in the capital markets that’s happening today. That really hasn’t impacted the size of transactions that we’re working on today.

These are typically financed our side of the transactions are typically financed by regional sized banks and that market’s still pretty healthy out there for the size of transactions they’re working on. They’re the last, we continue to watch it real closely but they have a very nice pipeline of business.

But you know as I’ve said in the past when we’re talking about our investment banking group, you should anticipate about 2 cents a year of earnings out of them. If it closed down, maybe it’s one cent. If they get lucky and everything closes, maybe 3 cents. But when it’s all said and done it’s a 2 cents a year earner for us. But quarter to quarter it does create some noise.

On the [inaudible] side they’ve got as strong a pipeline as we’ve seen in two years and that. A lot of that is just starting to close in the second quarter now. The wealth transfer group as you may remember did not have a particularly good year in ’07. Historically this has been our most profitable fee business line with operating margins of 25% or more.

But ’07 for whatever reason we had some issues with underwriting, getting a few cases approved and that and really didn’t have a robust pipeline as we have today. So I think you’ll see fee income pick up considerably out of these two segments. And the other business lines appear to be doing fine right now.

Deposit charges were up. A lot of that is because of hard charges for our customers when they’re as rates have decreased the hard charges that they’re paying us in order to provide the cash management services have increased. As I said earlier we’ll kind of see how that plays out. They may choose to leave more demand deposits with us as we go over the next – remainder of the year.

Before I turn this over to John though I did want to just comment. I mean we do have some challenges today but they’re isolated and primarily in the residential real estate market in Arizona. I think as we’ve spoken before, it’s really 6 to 10 credits down there.

That really hasn’t changed, I’ll let John spend more time about that, but it really hasn’t changed really over the last hundred days and that. We haven’t seen a worsening as far as new projects showing up at this point. As the year progresses we expect our core franchise to continue to show an improving operating results not only at the bank [inaudible] but two of our more important fee-based business lines do also.

We’re fortunate to have you know approximately 53% of the franchise business and especially our loan portfolio is located here in Colorado which continues to be one of the better performing states in the country.

We did mention also in the press release that we were looking to raise some Tier 2 capital. I want to make it perfectly clear this is not inconsistent with anything we haven’t been talking about for over a year now. We have said that we would sometime in the second half of ’08 looking for some Tier 2 capital.

We’re actually working on it now. So if we get it done before that then we’re going to go ahead and do it. It’s just to provide capital for growth at the bank level. It isn’t something that can be dilutive. We won’t be doing an equity issue anyway. And as you know it would be very difficult to do that today even if we wanted to.

But it’s not a result of a slowdown in the Arizona market. It’s something that we’ve been talking about for over a year to fund the growth and the franchise and that. So we’re looking at doing that. At this point in time we don’t have anything that will be closed in the next couple of weeks but probably will be a form of Tier 2 capital at the holding company that we will then inject into the bank to help them grow that we’re anticipating in the second half of the year.

With that, I’ll turn it over to John to make some comments about what he sees going on in the market here.

Jonathan Lorenz

Okay, thanks Steve. We’re obviously spending a lot of time today reviewing our loan portfolio, successfully [inaudible] the portfolio and develop Arizona and Colorado. And I would tell you as we continue to review the portfolio, we feel that the overall quality of the portfolio remains very [inaudible].

We continue to be served well in terms of the diversification of the portfolio where we have over half of the portfolio in commercially-related credit either owner-occupied real estate or C&I loans. And in spite of, it seems that we have a couple of non-performing loans that came into the Colorado portfolio in the quarter.

Overall the Colorado portfolio continues to perform very well. The overall risk rating of the portfolio is stable and as Steve said we feel pretty good about the overall outlook for Colorado as to the economy economic growth job growth as we move through 2008.

So our credit issues continue to be confined primarily to the Arizona land and land development portfolio. That end of the quarter about 114 million, that was down 8 million from where we were at the end of the year. And just to point out only a million of that was charged off. The other 7 million were paid out on that portfolio.

One of the primary home-building research firms in Arizona just released a report this week where they believe that the first or second quarter will mark the bottom of the new home market. We hope they’re right on that, it’s just one firm’s opinion but in any event it does appear that we are getting close to a bottoming in Arizona.

And we continue to believe that the impact of our real estate problems in Arizona will be much less severe than those being experience by the other Arizona banks that are engaged in real estate construction lending and residential in particular.

Today, we still have a very small amount of our non-performers in Arizona while the other banks engaged in real estate lending in Arizona are anywhere from 3 to well over 5% non-performers to the total assets. One of the reasons for that is I think our problem came somewhat later than the other banks.

Our projects slipped the net because our projects were in large part better positioned in the market both product-wise and geographically. And I think, quite frankly, we were loaning the better quality borrower. So even with our problem projects builders were continuing to purchase lots in the projects through December and even into January. So it’s really very recently that the overall continued slide in the market has continued or has begun to impact our portfolio of builders and developers in that market.

We still think that the number when I talked I think in January after year-end numbers that we had five to 10 credits that we were particularly concerned about in Arizona that we felt would be susceptible to further declines in market value of real estate down there.

That number as Steve said really hasn’t changed much. There’s been a couple of credits that have moved in and out but it’s still in that 10 kind of a number and we feel that’s a manageable level to be able to work through as we continue to search for solutions to our loans in that market.

Non-performers certainly may increase as we previously said as we move through the year our credits tend to be larger sized, $2 to $7 or $8 million on average. So a few credits can definitely swing our non-performer numbers materially as we saw in the first quarter. Having said that this quarter in April we’ve already been paid in full on a $1million non-accrual that just went on in the first quarter and has now been paid in full in April.

And there was a $1million pay-down on another non-performing credit that was put on non-accrual in the first quarter and now we’ve received a $1million pay-down on that credit also and in the largest non-performer in Colorado is an office building that is currently under contract and expected to close in mid-May.

I only point that out in that we are seeing some progress in terms of reduction in our problem loans. Certainly there’s the prospect and we expect some level of new problems to come on as the Arizona portfolio continues to experience the market correction. But again, we think that that is at a manageable level for us as we move through the year.

As you saw, our charge-offs were only nine basis points for the quarter. Our provision covered charge-offs for the quarter by over three times so we’re overall comfortable with the level of reserve that we currently have. As we look at the portfolio and the fact that today we believe it’s reasonable that we will see a reduction in provision expenses as we move through the year.

Certainly we’ll be coping with market uncertainties over the next couple of quarters. And there will be credits moving in and out. But I think that the direction that we see will be to reduce provision expense to some degree as we move through the balance of ’08 and into 2009.

So I’ll leave my comments with that and then Steve, do you want to open the questions?

Steven Bangert

Yes, I’ll just open up for questions now Melissa.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is coming from Ross Haberman from Haberman Fund. Go ahead.

Ross Haberman – Haberman Funds

Good morning, gentlemen, how are you? I was wondering if you have much exposure to condo or condo conversions in any of your markets?

Steven Bangert

No, actually I’m pleased to say on that one. That’s one that we’ve looked at two or three times and decided that that’s not an appropriate market for us to be in so we don’t have any exposure on condominium side either in Arizona or Colorado.

Ross Haberman – Haberman Funds

Okay. And I got on a little late. Could you just tell us generally, rate from worst to best, the worst markets and then the best.

Jonathan Lorenz

Well it is [inaudible] in my comments but overall market, Colorado is showing good job growth top 10 job states, job growth this year projected. Arizona is about flat in job growth and as to our portfolio reflecting that Colorado it looks pretty good, it looks pretty good for our growth prospects in our portfolio in Colorado which really started in the second half of last year and now is continuing into this year and Arizona we expect to see some C&I growth but we’ll be probably managing down our real estate portfolio in Arizona.

Ross Haberman – Haberman Funds

And just one final question. Do you have much second mortgage home equity exposure and much concern about that?

Steven Bangert

No. Very little of that. What we would do would really be is you’d see we have minimal amounts of overall consumer loans on the portfolio, less than 5%. And what we do in second mortgages really an accommodation to our business owners when they want an HELOC or second mortgage. But we don’t actively market that product in the market.

Ross Haberman – Haberman Funds

And finally, you’re going to be looking to further expand the insurance or the investment management side.

Steven Bangert

Yes. I think we’re going to continue to look for opportunities where we can add on to existing platforms and that. Small business lines, one or two person-type shops probably. On the investment management side I mean there’s really nothing imminent that we’re working on today and that. We always have an discussion with small insurance agencies where it would be relatively easy to absorb them into our platform.

Ross Haberman – Haberman Funds

Have the last three or four acquisitions been accretive within a year?

Steven Bangert

Yes, actually they’re all accretive the first year.

Ross Haberman – Haberman Funds

They are. Okay thanks guys. See you in Seattle.

Operator

Thank you. (Operator Instructions) Your next question is coming from Ben Crabtree with Stifel Nicolaus. Please go ahead.

Ben Crabtree – Stifel Nicolaus & Company, Inc.

Yes, thank you. Good morning. Could I get a little bit of a discussion of the seasonality and the insurance wealth transfer business. I never seem to hit the number right in my model and I want to make sure I understand the seasonality of it.

Steven Bangert

Yes, I think they play the seasonality Ben, just results from year-end most of our customers are doing year-end buying and so what we finish the fourth quarter I mean we really have there’s a flurry of activity in the third and fourth quarter and not an awful lot of marketing going on and that customers typically aren’t working on their estates actively in the first quarter of the year and that.

But we do this year for whatever reason and a lot of it may be that we weren’t that active last year and we had probably the best cycling I’ve seen and I should mention two years but it’s probably like three or four years as far as the first quarter pipeline of that business and that. But it’s always almost bad first quarter and that because there really isn’t if somebody’s working on an estate, they’re usually trying to get it done by the second half of the year on that.

Ben Crabtree – Stifel Nicolaus & Company, Inc.

Right. Right. So this is a pretty good base to be working from then, this quarter you’ve got right here.

Steven Bangert

Yes, it is.

Ben Crabtree – Stifel Nicolaus & Company, Inc.

Kind of jumping around a few questions. You have in the past been pretty comfortable running with the tangible equity of the asset ratio and I know that’s probably not the primary one you look at, but down in the five area it’s been higher after the equity raise of last year. I’m just trying to get a sense of you know in today’s environment obviously everyone is you know saying the mantra of capitalist king and I know you’ve talked about Tier 2 capital but I mean where is your comfort zone in kind of tangible equity the asset ratio these days?

Steven Bangert

You know, I think we’re pretty comfortable with the levels that we’re at today. I think you’ll probably see us to build off of these. You know we’ve been running you know if you back up a few years ago, like four years ago, we were down around 4.25%. Today, we’re running closer to 6%.

We have been running up over 6% until we did a couple of small transactions at the end of the year. That used up a little bit of our canceled capital. I’d like to see it get up about 6% again and that. But you probably got the feel from John that today we’re not overly nervous about our issues and the economy down there.

Obviously the economy seems to fall apart nationally and internationally. You know things could change. As of right now, we’re feeling relatively comfortable with where we’re at.

Ben Crabtree – Stifel Nicolaus & Company, Inc.

Yes. Another question, your reserved loan number now is higher than I think I have ever seen it. Well we do go back a bunch of years but trying to get a sense of how much of that might be allocated to that, to the 114 million of land loans?

Steven Bangert

Let us see. I do not have that specific number for you Bain but I think as to that overall portfolio we have probably got, as I mentioned, about 114 million there is probably close to 50 million that is great in somewhere from our watch to great fix up standard credit. So that gives it, so certainly then all of that risk rate at four through six watched it substandard of about 50 million is part of the reasoning for the increase provisioning and assigned to those specific credits.

Ben Crabtree – Stifel Nicolaus & Company, Inc.

And Lyne, we recently talked about the kind of dynamics of land value using Phoenix and things like that and my understanding is that typically you made those land acquisition loans that have been sort of at 65 or 70% of cost, of investor cost and that the last we read about land values in Phoenix is that their down 30 or 40%. So I guess is that kind of the way you read it and have you seen the investors start to walk away from their deals and basically turn the land back to you in a significant amount?

Steven Bangert

In the few loans that we have that we extended to lots acres as they are called down there where they raise equity from a fairly diversified group of individual investors and therefore we did not have guarantees on those loans but again that is limited to probably six or seven credits in the whole portfolio. Undoubtedly the economics are such that we are starting to get those credits used either back or trying to find some alternative to work out of them. But those are really in the ten credits that we identified that would be susceptible to further market decline.

As with the overall market it is hard to describe in Phoenix in terms of a broad based statement because it is such a broad and diverse market and as to the decline in market value if you go into the perimeter areas that we talked about they are seeing anywhere from 70 to 90% plus decline in value in the perimeter market.

And that as we have talked about before as you come in its less but clearly the interior markets are being impacted so you are seeing 30 to 40% reductions in market values as projects are moving more interior projects today also. So it is hard with the declines we have seen it is hard to see that there is much farther to go because there has been so much deterioration already.

The other thing I point out is that on our loans that have been on the books for a period of time we always require if it is for developed residential lots but as those lots are taken down the developer pays a part amount plus an acceleration.

So, on the projects that have been on the books for awhile even though land values continue to deteriorate we are ahead of the game, if you will, because they have been on an accelerated pay down basis as builders have taken down lots. So if we work through the projects we have built up more equity in the remaining lots that we hold as collateral.

Ben Crabtree – Stifel Nicolaus & Company, Inc.

Okay great. Thank you.

Operator

Thank you. Your next question is coming from Jason Werner with Howe Barnes. Please go ahead.

Jason Werner – Howe Barnes Hoefer & Arnett Inc.

Good morning everyone.

Steven Bangert

Good morning Jason.

Jason Werner – Howe Barnes Hoefer & Arnett Inc.

I was late in the call so if you have already answered this I apologize but you had said, the last call in today either five or 10 credits in Arizona in the land acquisition categories that were given you concern. I was curious how many of those credits were responsible for the increase in the MPAs this quarter?

Steven Bangert

There were three related credits to one live banker in Arizona that comprised virtually all of the nonperformer number for Arizona.

Steven Bangert

Jason if you did not hear it I had mentioned that really over half the MPAs are here in Colorado and it is really three credits that we really do not think that we have any significant exposure to. And they are working their way through, we expect them to work their out of the nonperforming category over the next quarter or two.

Steven Bangert

We expect improvement in Colorado and we do expect more performing in Arizona.

Jason Werner – Howe Barnes Hoefer & Arnett Inc.

So the five to ten are still kind of concerns but they are not MPAs yet.

Steven Bangert

Other than the three that I mentioned and there will probably be, I would say a couple of more this quarter that will go to nonperforming status unless something significant happens with those credits.

Jason Werner – Howe Barnes Hoefer & Arnett Inc.

Okay. How does your 30 to 90-day delinquency look right now?

Steven Bangert

Thirty to 90-day. It is pretty good. I do not expect the thirties, one large credit in there, which was in the 30 to 90 of about $8 million at the March numbers. That was the most significant one. That is one that may move to nonperforming status in the second quarter and that is in Arizona. And other than that, pretty much all the rest of the loans that were in 30 to 90 at March 31 have been renewed or cleaned up. So it is really just that one that will be a further problem for us.

Jason Werner – Howe Barnes Hoefer & Arnett Inc.

Okay and again did you say already, if you did I apologize, how much of the margin compression was due to interest reversed?

Steven Bangert

Yes, the margin decreased

Lyne Andrich

I am sorry. It is very nominal maybe one or two basis points related to non-accrual margin compression.

Steven Bangert

Most of the margin compression, Jason, about 75% of it was a result of 200 basis point decrease in fed funds and the rest of it, a lot of just a mix on the liability funding side. But we also mentioned that we thought that margin should kind of hang in there over the next couple quarters.

We will get some relief as some of our broker deposits are running off and we are replacing them at much, much cheaper funding sources. But we thought that would be somewhat offset by the growth that we are anticipating coming on our forward margins and then what is on the books today.

Jason Werner – Howe Barnes Hoefer & Arnett Inc.

Okay, thank you.

Operator

Thank you. Your next question is coming from Peyton Green with Ftn Midwest Securities. Please go ahead.

Peyton Green – Ftn Midwest Securities Corp

I was just wondering on the expense side to what degree any expenses might have been frontloaded in the first quarter versus the second quarter? And then also if you kind of talk looking at first quarter a year ago there was some investment banking compensation expense that, if I recall correctly, was kind of unusual and so the year over year expense is closer to 13 or 14% and I was just wondering is that going continue or are there any inefficiencies that will get worked out?

Lyne Andrich

I think for the most part our first quarter run rate for expenses is probably pretty normal. There is not a lot of unusual that you are not going to see recurring. You are correct in that year over year first quarter of 2007 we had some kind of higher than normal compensation related to the investment banking. That would be about $150,000 if you are looking at period comparison period over period. Outside of that most of the cost that we have in place are normal. You will see, the only thing I would comment on, on a run rate from the late quarter basis. Our comp plan went up quite a bit, part of that was 5% as related just to the typical merit increases –

Steven Bangert

– as of January 1st

Lyne Andrich

– and promotions. Our payroll taxes as you probably are aware is normally a little larger in the first quarter as all those FICA limits are reached at. But it should be pretty normal run rates moving forward. All of the other increases we have seen year over year I think are normal run rates so we are running at a higher level at FICA costs.

Our marketing costs are a little higher related to that brand new campaign that we have commented on before. So I think it is a good run rate. I will note we had a $1.5 million worth of expenses, non-interest expenses in the first quarter related to the two new acquisitions and that is distorting our year over year comparability.

Steven Bangert

And then we mentioned the two banks that we are opening up now. And that we are staffing and are paying rent on, one is in Colorado, one is in Arizona.

Peyton Green – Ftn Midwest Securities Corp

Then I guess my question is, is with 1% kind of growth in net interest income you almost never get operating leverage growing expenses at 12 or 13%. I guess which one budges when. Do you expect to really get a fair amount of net interest income growth over the next couple of quarters or is it really

Steven Bangert

Yes I think Peyton if you remember a lot of it was those expenses, that expense increase. It was a record year for us on the bankers side in that. And now you would hope and the way it is supposed to play out is we are supposed to growth in those bankers and now a lot of those bankers that we recruited last year that is part of the growth projection that we are continuing to expect as we talk about the second, third, and fourth quarter of this year in that.

You have seen a lot of the growth banks such as ourselves kind of hit the wall as far as growth is concerned over the last year and with the exception of us. I know this quarter does not look good but it would probably be unusual. It is not unusual versus any of other first quarters in that. And I think you can look at the last three quarters and we have had significant loan growth in that.

You are going to see these bankers now start to pay for themselves as we head into the year. And I also think, I know we have mentioned to you, Peyton before one-on-one but just for everybody else’s benefit. I mean do not think you will see that kind of growth as far as new bankers this year in that.

We still are out there actively looking for bankers and there may be some opportunities in that but I think that was a very unusual year. We are not likely to be putting bankers on at the same pace. You should see a slow down as far as operating expense increases on going forward basis.

Jonathan Charles Lorenz

Peyton, it is Jon. I will also tell you that we are taking a harder look we do not have many marginal performing bankers in the franchise but we are looking at that and looking at where we can have any consolidation as it relates to bankers. And as we elude a banker from time to time those bankers, their portfolios are going to be consolidated as opposed to replacement. So we are really trying to hold the line on bankers and bankers comps for 2008.

Peyton Green – Ftn Midwest Securities Corp

And then to follow-up. In terms of the growth opportunities that is out there, is there, I guess, an improved opportunity given the headlines that are in the newspapers about Colorado and certainly about Phoenix versus big banks or how would you view the competitive response to slowing economy overall?

Steven Bangert

Well, I think in Colorado we are seeing pretty good dynamics with the economy. We had a presidents meeting with all of our presidents yesterday and went around the room and pretty much all the banks felt that had pretty good pipelines in that place and they see growth in their portfolio in the second and third quarter. And that was pretty much true with all of our Colorado banks. A little more spotty in the Arizona banks.

As we have said before I think that, hopefully, what will play out in Arizona is some opportunities from the other banks that do have much higher levels of nonperforming loans in that market and we are seeing some tightening up of those banks and tightening in underwriting standards and just the typical thing where some of their best customers are not getting very close attention. So we are seeing some opportunities and we hope to see more in terms of picking up some market share in the Arizona market.

Peyton Green – Ftn Midwest Securities Corp

Okay and then I guess with respect to Colorado. You all certainly had a good year last year. Do you feel like the pipelines have rebuilt themselves to stronger than they would have been a year ago or six months ago or where do you feel?

Steven Bangert

The second half of the year was where we really started to see the pickup in Colorado but I think we are starting off this year better in Colorado than what we started off last year and we will just have to see how the momentum continues as we move through the year. As Stephen had mentioned in April we are already have long growth higher than what we had for the whole first quarter and about two-thirds of that growth came out of the Colorado bank in April.

Peyton Green – Ftn Midwest Securities Corp

Okay great. Thank you very much.

Operator

Your next question is coming from Bain Slack from KBW. Please go ahead.

Bain Slack – Keefe, Bruyette & Woods

Good morning. Hey I wanted to see if we could get a little more color on the three MPAs in Colorado with regard to industry and I guess just maybe some clarity as to why we feel these are isolated.

Steven Bangert

The one that I mentioned is loan where the collateral is a commercial office building that is under contract. That one we feel we have, we have recent appraisals that would indicate we have pretty significant equity in that property where we are maybe 60% loan to value. The issue is more of a disagreement and issues within the ownership/partnership where there has been capital called that have not been fulfilled.

So they are kind of at a stale mate with the partnership/ownership group. So they have decided to put the property up for sale as a result of that and as I mentioned, we have got a contract that is scheduled to close in May.

Certainly if it does not close I would say we do not see that as a loan that has any debt loss potential but if the partners are still fighting that would be one that would have a nonperforming potential. For some reason the contract does not close. There is also a secondary contract in place on that one. So it could just be more of a timing issue.

The other two credits. One is a, basically a cash flow loan that we had on a company, a recapitalization and where a private equity firm came in and purchased a local company. The company has not been performing well but the equity investors have put significant equity in front of us.

So again we feel that on a value basis we do not have much if any loss potential on that credit but it is in a tight cash flow situation so the company is making their interest payments on a current basis to us but is not making schedule principle pay downs on the loan. S

o we are not being paid in accordance with the terms i.e. receiving the principal payment in addition to the interest payments we put that loan on accrual and we are applying interests to principal on that loan. That is a participative credit so where we are not the lead so it makes it a little more problematic for us in terms of managing and control over the credit. So we are just pushing really hard to get taken out of that credit at this point by the lead bank.

And the third credit is also a CNI loan out of Boulder bank. It was sports wear company that ran into some inventory issues. They have sold the business though to another party and that company is liquidating our inventory in the normal course of business and we expect some pretty substantial pay downs probably in excess of a million dollars during the second quarter on that loan.

So again with all of them, we feel that we do not have significant loss potential in any of those three at this point. And hopefully resolution to them in the next one to two quarters.

Bain Slack – Keefe, Bruyette & Woods

I appreciate that. I guess last question is with regard to, I think in the press release you all had gone over your regulatory capital ratios at the bank sub as of the end year. Would you have those updated for the first quarter?

Lyne Andrich

Bain, this is Lyne. No unfortunately I do not have that finalized quite yet but at the bank level because we did see organic capital build and the provision we charged off of $5 million we only wrote off a million seven in actual losses.

As you know in terms of regulatory capital that built our capital by $3 million at the bank level. So I am expecting core capital to have grown and it is pretty unique in terms of balance sheet or asset growth for us. So I suspect, my capital ratio at the bank level should be pretty flat or consistent with where they were at the end of year.

Bain Slack – Keefe, Bruyette & Woods

I appreciate it. Just to continue on the capital. Steve, obviously talked about the tier two thing before. I guess what I was a little confused about was the in the press release it appears that you all saying that the tier twos based on the current economic uncertainty but today it is really due to growth opportunities. Can you just kind of reconcile these two?

Steven Bangert

Bain that is a fair comment. I saw your comments and then that is why I was reacting to your comment. I think we gave the impression that it was. As you know, I think every bank is being asked of what are you doing as far as the capital viewpoint and as far as capital. We typically would not have even commented on this but we thought well let’s go ahead and let them know we are continuing to try and raise some capital.

As I said it is probably around $20 million at the bank level and that. Maybe it is a little bit more or maybe it is a little bit less but somewhere in that neighborhood. But it is really something that we have been talking about for quite awhile and that.

But as I read the press release really kind of after I read your comments I could see where there is a little bit of confusion but you go back three or four conference calls in discussions we have had with you and other analysts we have talked about so long about trying to do some capital raising in the second half of ‘08.

I guess we are trying to step it. We would have been working on it in the fourth quarter. We are stepping up and working on it now not knowing whether the economic conditions might get worse, might make it harder to raise capital in fourth quarter. I guess that is probably the best thing.

Bain Slack – Keefe, Bruyette & Woods

That makes understanding that comment a little bit better. I appreciate that.

Operator

There appears to be no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Steven Bangert

Well thank you again for you continued interest in CoBiz. As I have mentioned earlier, it is a difficult quarter for us but really a lot of positive things going on other than some isolated incidences in the Arizona market.

I think Jon said it pretty well. If you are in Arizona you are going to have some issues. If you have any real estate exposure in Arizona you are going to have some issues but for those of you that have some exposure to some of the regional banks such as Zions, M&I that their issues are considerably worse than ours in that.

And I think that ours are very manageable and as the year progresses I think you will continue to see some pretty good momentum in our earnings and that. We will be set-up real well as we head into ‘09. So with that I will leave you and thank you for participating. If we can answer any further questions please give any of us a phone call directly and we would be happy to talk to you. Thank you.

Operator

Thank you. This does conclude today’s CoBiz Financial first quarter 2008 earnings conference call. You may now disconnect.

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Source: CoBiz Financial Inc. Q1 2008 Earnings Call Transcript
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