CoBiz Financial Inc. Q2 2008 Earnings Call Transcript

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 |  About: CoBiz Financial Inc. (COBZ)
by: SA Transcripts

CoBiz Financial Inc. (NASDAQ:COBZ)

Q2 2008 Earnings Call Transcript

July 24, 2008 11:00 am ET

Executives

Steve Bangert – Chairman and CEO

Jon Lorenz – Vice Chairman

Lyne Andrich – EVP and CFO

Analysts

Ben Crabtree – Stifel Nicolaus

Peyton Green – FTN Midwest Securities

Bain Slack – KBW

Operator

Good morning. My name is Ray and I will be your conference operator today. At this time, I would like to welcome everyone to the CoBiz Financial second quarter 2008 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 period. (Operator instructions) Thank you. It is now my pleasure to turn the floor over to your host, Steve Bangert, Chairman and CEO. Sir, you may begin your conference.

Steve Bangert

Thank you. Welcome everybody to our second quarter conference call. I think you’ve already had an opportunity to see last night’s release. We are real pleased with the quarter. It seems like earnings were coming from throughout the company. I’ll quickly go over a few items and then turn it over to Jon Lorenz, the CEO of the bank, and then Jon can speak to what’s going on in the Arizona and Colorado markets. I also have Lyne Andrich, our CFO, in the room for any questions that any of you might have.

Earnings for the quarter were $0.18 versus $0.07 in the first quarter. So, quite an improvement over our first quarter. It seems like the first quarter really nothing went well for us, but the second quarter as we thought would happen, we saw vast improvements throughout the franchise. So the $0.18 versus $0.07 was a good improvement, but it’s $0.18 versus $0.23 same quarter last year.

Strong earnings growth, really I think despite about $0.17 provision that we thought it was a prudent time to continue to add to the reserves. So, from cash flow earnings, I thought maybe this was probably our strongest quarter that we’ve had as a franchise. So we’re real pleased with that. The two markets that we are operating in are obviously two very different markets today. I think we're fortunate that two-thirds of the franchise system in Colorado, which continues to perform very well by almost all measures as one of the top five states in the country today as far as economic activity. It’s not going gangbusters in Colorado, but it still is a pretty healthy economy for us. I think the recent Case Schiller Report showed that we still have positive housing appreciation in the Denver market. Commercial real estate market continues to be pretty healthy in that. So we are feeling very good about the Colorado economy today.

Arizona economy, on the other side of the coin, is having some difficulty. They continue to lose, have job losses in Arizona, primarily in the construction sector, but nevertheless there are some job losses down there and some real estate depreciation obviously in that. On the positive side, they do continue to have in migration, but probably not at the same pace that they've had over the last five years. But over time, we think that the Arizona market will resolve itself. It’s just the matter of what period that’s going to take. And my guess is for the outskirts of Phoenix it's going to take three to five years and may take us before some of that market becomes healthy again.

The earnings highlights really were improved net interest margin during the quarter and with very healthy loan growth really with Colorado leading the charge, but Arizona also had little bit of a contribution on the loan growth side. Really strong net interest margin – non-interest income really coming from all areas of the company including the bank, and then relatively stable asset quality metrics. Jon will comment about that later, but non-performers were up slightly about 89 basis points of assets and that was pretty consistent with what we discussed in our prior conference call.

In looking at the bank loan growth 86 million, about 18% annual growth rate. So that was – if you remember, we had a relatively slow first quarter, not unusual for us. We almost always have a slow first quarter. So it’s nice to see the pickup there. I think we are especially happy to see the pickup in the C&I portfolio in the Colorado market, which is really (inaudible) with the charge as far as the loan growth was concerned. Arizona also had some loan growth, which probably would surprise many of you. It probably surprised us too, but there still are a number of very good credits down there if you're selective in that.

Reserves, we continue to build reserves, now at 132 basis points. Part of that obviously was – part of the provision this quarter was because of the loan growth that we had to provide for the loan growth, though really that was a prudent thing to do, to continue to build reserve as the Arizona market works its way out. Deposit activity didn’t look too good on paper. Deposits are difficult right now. We’ve run off about $100 million during the first half of the year, about $80 million came in the second half of broker deposits. We’ve never been very dependent upon broker deposits, but we use those as an alternative funding source as we do the repo market with the Federal Home Loan Bank borrowings. But during the credit crunch, the spreads on broker deposits widened considerably.

Traditionally, they have been within about 10 basis points of Federal Home Loan Bank borrowings. And every now and then, they would be right on top of those borrowings. And when that happens, we are pretty active in that market. I think kind of the high water mark, though, probably is around 7% of our deposits have been in broker deposits. As we ran them off, I think we are down to around 1%, primarily because those spreads went from around 10 basis points over Federal Loan borrowings to excess of 100 basis points, and more recently have started to come in. I think today we are seeing them average around 30 basis points over Federal Home Loan Bank borrowings. And more recently, I think we even saw the opportunity to do some at 20 basis points over. So I think over time you will see us probably get a little bit more active in that market. But once again, it really has been a large funding source for us, but when – I think the prudent thing to do was to use other funding during this period of time while the deposit market kind of – the broker deposit market anyway kind of work its way out.

Also during the quarter we had three large accounts move, I think, over 20 million a piece or around $50 million out of the bank. These are just three accounts that are very active in moving money around. I don’t think we look at it because there isn’t anything unusual about what happened with any of the three. But certainly the challenge for us is going to be deposit gathering in the second half of the year. We probably will need to be a little bit more competitive with some of our pricing, but a lot of that will depend upon loan growth. And although as we see here today, we are anticipating that loan growth won’t be at the same pace that you saw in the second quarter, but you never know with a lot of the credits right now. Lot of the good quality credits are looking at various banking alternatives I think for big banks for making it difficult for them in some cases. And we are seeing a lot of opportunities that we might not normally see. And so I’m not expecting the same type of loan growth, but we don’t know, and if the loan growth does continue with this type of pace, we will see it will have to be pretty aggressive on the deposit pricing. And that could put a little bit of pressure on net interest margin.

Fee income at the bank was up 43% year-over-year. So we were real pleased with that. I mean, it’s coming out of a lot of different places, but obviously loan and deposit fee income kind of leads the charge there. But we are also getting some fee income out of our interest rate swap. Importantly, that’s where we are selling interest rate swaps to our customers as well as our mezzanine investments. So I think we are real, real pleased with that.

I’ll let Jon talk about the credit metrics and what’s going on in the Arizona and Colorado markets here shortly. But let me quickly kind of touch on some of the non-banking businesses. Insurance. The contribution before overhead was about 182,000 or just a little less than $0.01. If you remember last year, we were real disappointed with our wealth transfer area. They had a very disappointing year. Historically they have done extremely well for us with very healthy margins, margins in excess of 20%. It looks like this will be a good year for them. They had a real good second quarter and have a really nice pipeline of business. So I do think last year was just an aberration and not likely to repeat itself. We are expecting that the insurance segment will be a strong contributor in the second half of the year. So we are real pleased with where insurance is today and we would expect it to be a strong contributor going forward.

Investment banking, great quarter for those guys. $0.04 contribution to our earnings this quarter. They still have a very healthy pipeline. I think we are just being cautious with it. We have seen a number of deals move to the hold status, which we haven’t really experienced in the past, certainly not the number of deals that we're seeing today. So I think we could have a decent second half of the year, but I want to be pretty cautious about that.

On the Investment Advisory & Trust, that's our youngest and smallest segment, they are essentially operating at breakeven before allocations today. But we don't really expect much of a contribution coming out of that segment for the remainder of the year. It really has never really rolled up to more than $0.01 in the past, but right now we are finding customers who are very cautious about investing in today’s market. So we are kind of – I really don’t think you’ll see much of a contribution, if any, coming out of that segment for the second half of ’08 anyway.

Hopefully last night in a separate filing, we had an 8-K filing last night that talked about a capital raise that we are doing. It is going to be done with (inaudible). Essentially, a $5 million to $30 million offering is what we’ve announced subordinated debt non-dilutive capital. It will be a ten-year instrument with a five-year note call priced at 9%. And we are looking to get this accomplished in August. And this is consistent with what we said a year ago in the same conference call was that we would not be looking at raising capital in ’07, but our plans were to do it in the second half of ’08. We certainly didn’t expect the capital market to dry up during that period of time. But fortunately, we have other avenues to go and so we will be doing this internally here during the month of August.

Also during the Board meeting, the Board did approve the $0.07 dividend again for the quarter. So we were pleased with that. And then last, before I turn it over to Jon, I just want to let you know that there is a cost containment program within the company that really is a company-wide initiative, really what we’ve asked all our employees throughout the company to come up with ideas and that we’ve been very, very pleased with some suggestions that are being made. We think in today’s economic – in today’s economic condition, it is probably – the prudent thing to do is to sit down and kind of talk about where we might be able to cut some costs here and there, or at least contain cost. We are not going to be able to make any wholesale cuts. This is a company that continues to growth double-digit growth rates. You can’t grow it and be cutting costs significantly at the same time. But there are some opportunities out there that we will be taking advantage of.

And I think really the goal for us is to have minimum growth on the expense side for the second half of the year. We are telling all of our companies that we really let’s hold the line as far as new hires. That doesn't mean you can’t hire somebody, but if we are looking at bringing on new people, we probably would be just replacing people that are exiting the franchise. And this was a good time to do that. And hopefully you will see some results with that as the year progresses into ’09. The employees are really leading the charge with us and have made some significant contributions there.

With that, I’m just going to turn it over to Jon and let Jon kind of talk about what’s happening in various markets.

Jon Lorenz

Thanks, Steve. Given the continuous deterioration in the Arizona real estate market, I think our loan portfolio really held up quite well in the second quarter. I think our diversification within the portfolio is the key reason for that. As Steve mentioned, most of the growth that we had in the second quarter was in our C&I portfolio, which is where we’d like to see it. C&I still represents about a third of our overall loan portfolio and I think really that diversification is really helping us through what clearly is a difficult overall economic period, particularly in Arizona.

Our non-performers did increase in the second quarter. But I think from a dollar standpoint, it really was a very marginal increase. That is a $5 million increase in non-performers on a $2 billion portfolio. To me it’s a pretty nominal amount. And as you work at the metrics today at 89 basis points, as Steve mentioned, of non-performers, that clearly compares very favorably with virtually any other western bank in terms of non-performers where we are seeing most of those banks reporting second quarter non-performers at anywhere from double that in the 2% range up to 5% or 6%. So we feel very good that we’ve been able to maintain non-performers level to date at under 1%. I probably would have expected it to be a little higher than that at this point.

We had also made some progress in the second quarter on our non-performers. We did get about $2 million paydown in April on a lot loan that we had in Arizona. We did have three new credits that went into non-performing status and accounted for the bulk of the increase, actually four; three real estate related in Arizona and one commercial credit in Arizona. We did not have any new non-accruals in Colorado during the quarter.

You may recall that as we talked, it was kind of anomaly again at the end of the first quarter where most of our non-performing at the end of the first quarter resided in our Colorado portfolio. And our expectation was that we would see more non-performers in Arizona going forward with which we have in the second. But the positive thing about that is that we do not have an increase in non-performers in Colorado. And you also may recall there is a 90-day past due loan of about $4.5 million at the end of March, which was paid off in full in the second quarter. So we are seeing some pretty good rotation in activity now within that non-performing loan category. And we do still today just have one property in OREO at $2.6 million roughly, pretty nominal level of property or loans that have moved to an OREO status.

As to the charge-offs in the quarter, we were about $3.6 million. Not surprisingly, two land development credits were comprised most of that charge-off level of $3.6 million. And as we talked before, given the larger average size loan that we have as a bank in a franchise, two credits can make a pretty big number, and that again the $3.6 million really was just due to writed-owns in three specific credits.

As to the outlook for both states, Colorado, as Steve mentioned, we’re still feeling pretty good about. We’re not seeing any deteriorating trend within the portfolio, just some stock credit issues that continue to develop over time. Residential real estate would probably still be our primary area of concern up here and that we are really not seeing any improvement in residential real estate. But as we talked before, most of the residential problems are in the northern part of the state. We are concentrated in central Denver. But we don’t see any significant issues for us there, but we’re certainly not seeing any improvement yet in residential real estate in Colorado either. But still we’d much rather take that than what we’re seeing is still some continuation in decline in land values in Arizona even today. But I would say with the severe declines we’ve seen in property values in Arizona, we actually now are seeing a pretty good level of interest in activity, particularly for finished lots, and finishes lots that are in the central Phoenix area, not in the outlying areas.

Our one OREO property that I’ve mentioned, we are now actively marketing that property. We've gotten five or six indications of interest all from homebuilders, not from speculators. So these are homebuilders that are looking at taking these lots directly into production. So I think that’s the positive side of the severe decline in values in that market in that. Now we are getting an affordability factor, if you will, back into the Arizona real estate marketplace.

We’ve talked before, I hate that we are seeing some spillover from residential and commercial weakness, real estate weakness in Arizona. As I’ve mentioned before, that’s primarily occurring in the retail area and we have almost no retail construction real estate exposure in Arizona and really a very small exposure in commercial real estate construction in Arizona. So that’s not an area even if we see some continued weakness there that we see any significant impact to our loan portfolio in terms of commercial real estate deterioration.

In Colorado, the commercial real estate market is very strong and quite frankly continuing to strengthen. Vacancy rates are stable or going down. We're seeing increases in rent particularly in the downtown Denver District and the Northwest corridor between Boulder and Denver. And so whether that’s real or commercial office space, R&D space, all the commercial real estate sectors are performing very well in Colorado today. So currently what we are seeing [ph] are we continue to focus on our pocket of problems, loans in residential real estate in Arizona, continue to feel pretty good about performance of the Colorado portfolio, and expect that to continue to perform well through the balance of this year.

With that, I’m just going to open it up for questions now.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Ben Crabtree of Stifel Nicolaus. Please go ahead.

Ben Crabtree – Stifel Nicolaus

Thank you. Good morning.

Steve Bangert

Good morning, Ben.

Ben Crabtree – Stifel Nicolaus

Gentlemen, I’m just trying to remember what you had said last time about the size of the construction development – the residential, if you will, the builder book in Phoenix, as I recall, was a little over 100 million.

Jon Lorenz

Yes, that’s right. And in particular, the land and land development is the primary component of that at a little over 100 million in Phoenix.

Ben Crabtree – Stifel Nicolaus

And what I heard you say was that there has recently been developed a level of interest in actually buying those properties. I don’t know if you would be willing to say what kind of a haircut you are going to required to take on those to move them.

Jon Lorenz

It’s a little hard to tell yet. I think we are probably going to get some pretty low offers is my expectation. But the fact that we are expecting multiple offers is a good thing. So I’m hopeful that we can move some of those prices up. Another factor again that enters into it, there are definitely some cash buyers out there and we have three or four people that are talking cash purchases of the lots we currently hold in OREO. Another way to go and a way we can try maximize more value is if we work with a builder on loan option [ph] basis because clearly builders would rather take down lots as they need them as opposed to making a big upfront payment. So we’ll also be evaluating based on the strength of the builder, their commitment, we think, to the project, and maybe offering an option arrangement as opposed to accepting the lower cash price offer.

Ben Crabtree – Stifel Nicolaus

Okay.

Jon Lorenz

And overall, Ben, we said the land acquisition and development portfolio in Arizona was relatively flat for the quarter. We were down about $6 million overall for the bank and our land A&D portfolio. But we also just month to date in July have gotten about $6 million in additional paydowns in the land portfolio, all from Arizona.

Ben Crabtree – Stifel Nicolaus

Okay. A couple of follow-ons on things that Steve had mentioned. You talked, Steve, about the capital raise, the sub debt, obviously that doesn’t do anything for your common equity ratio. You’ve always run in the five to six areas. You’re 5.6 now. Given your loan growth prospects, it seems like it would be – that you are going to need to do something with equity before too long.

Steve Bangert

Ben, I don’t think I need to do something in the 18 months. I don’t know what the – as I said, I’m expecting loan growth to taper off in the 18% – I mean, it wouldn’t surprise me if it’s more of a 10% type growth scenario for the rest of the year. As I said earlier, it’s difficult to forecast that because we don't know what opportunities we're going to get from credits that are coming out of the big banks, because we are seeing that today. We saw some very, very credits that we haven’t seen in the past. But assuming that I’m right about the 5% to [ph] 10% growth rate, I think we’ll be fine for the next 18 months.

Ben Crabtree – Stifel Nicolaus

I’m just looking at ROE that’s kind of at 10% and your equity retention wouldn’t seem to even support or be able to keep up with the 10% loan growth.

Steve Bangert

Lyne, do you want to comment about that?

Lyne Andrich

Yes. Ben, I’m not sure when we look at our model based on what we feel in terms of our earnings momentum that we have going into the next year, I think that’s certainly something we can sustain actually.

Steve Bangert

Yes. I think – Ben, I guess it depends upon what you put in for loan loss provisions for the next 18 months. I think –

Ben Crabtree – Stifel Nicolaus

Yes, that’s great.

Steve Bangert

Second half of the year won’t be – as we don’t anticipate provision as large as the first half of the year. Obviously that may change, but today as we look at things and where it seems like things are stabilizing in our Arizona portfolio, we are looking for reduced levels on the provision itself

Ben Crabtree – Stifel Nicolaus

That would be great.

Steve Bangert

Yes.

Ben Crabtree – Stifel Nicolaus

You might stand out against the crowd if you actually do it.

Steve Bangert

Historically, Ben, we have though. I mean, credit metrics for 14 years have always been better than the crowd. In Arizona, there are going to be some issues down there. And I think that for us, as we’re going through the subordinated debt operating right now, we’d see the biggest risk as being headline risk because we are going to have some bank failures in Arizona. We think long term that’s going to create some great opportunities for us, but we do know of few banks, especially some privately held banks that are likely to be taken over and some of them may be even in the next 30 days. So with that in mind, I mean we feel kind of a sense of urgency, although most of this capital realistically is going to be raised in Colorado. But nevertheless that headline risk is something that we’re concerned about and really would like to have most of the money gathered by the middle of August.

Ben Crabtree – Stifel Nicolaus

Okay. And then the last question, I just want to make sure I interpreted this correctly. You said something to the effect that the insurance business would have a strong second half. I’m trying to interpret it. Does that mean it would be better than the first half or it would be–?

Steve Bangert

I think it would be better than the first half.

Ben Crabtree – Stifel Nicolaus

Okay. So it’s a pretty good year then?

Steve Bangert

Yes, I think insurance is really performing very well this year. And property and casualty, which is where we had some issues over the last two or three years because of the soft market and commissions especially on the commercial side coming down double digits year-over-year, we kind of have changed the platform that we are operating at and it looks like commissions is now starting to flatten out somewhat. So, even property and casualty is contributing, which they really haven't in the last couple of years. So we are getting it from employee benefits, from life, and from property and casualty now.

Ben Crabtree – Stifel Nicolaus

That’s great. Thank you.

Operator

Thank you. Our next question comes from Peyton Green, FTN Midwest Securities. Please go ahead.

Peyton Green – FTN Midwest Securities

Yes, good morning. I was wondering if you could put some brackets around the potential expense benefits that you get just from refining things. And then also with respect to the non-interest income, if you had a softer quarter, would it be the third or the fourth do you think?

Steve Bangert

If we had a softer quarter?

Peyton Green – FTN Midwest Securities

Yes, just in terms of the volatility of the insurance–?

Steve Bangert

Yes, it’s likely to be the third quarter, with the fourth quarter being a stronger than the third.

Peyton Green – FTN Midwest Securities

Okay.

Steve Bangert

You want to answer that, Lyne?

Lyne Andrich

Sure thing. When we look at our expense cost containment initiatives that we're looking at, I think it’s reasonable to expect that we can realize a 3% saving on hard run rate basis in terms of non-interest expense run rate. If you go back and actually look at our quarterly numbers, it’s kind of hard to – it’s not very evident when you look at just our NIE run rate. If you look at what our fixed expenses are and stripping out the variable compensation we have related to investment banking bonuses and commissions for our insurance salespeople, we were actually down 4% from Q1 to Q2. So I was really pleased to see that. And then normalizing the second quarter of ’08 versus the second quarter of ’07, after your strip out the acquisitions and then taking – excluding the variable compensation again, it’s only up 5% year-over-year. So we had seen on a run rate basis some improvement Q1 to Q2, and certainly from the latter half of ’07 and into ’08. The expense growth rate has de-accelerated. And in terms of what we are doing, part of it – a lot of it’s going to come out of the compensation line item. We've really scaled back our recruitment efforts. We had no new net headcount adds in the second quarter. We had a few people come on board, but we had a few people exit the franchise. So as I look forward, I think that’s the number that we’re going to focus on and continue to concentrate.

Peyton Green – FTN Midwest Securities

Okay. And then more philosophically, I mean, it seems like there's a great opportunity (inaudible) market share in both of your markets. But why would you raise common equity here knowing that you can get better loan business, better spreads going forward?

Steve Bangert

Peyton, I'm not ruling that out. That certainly could happen, but it will depend upon how successful we are at actually doing that. And I want to be real cautious about that right now.

Jon Lorenz

Peyton, the other thing too, I mean, just picking a number and say we’ve raised 30 million in sub debt, that gives us the ability to leverage that into over $250 million of loan growth. So, that gives us quite a bit of room there. And as to our other equity metrics ratio, we are still in very good shape from our regulatory well capitalized standpoint on everything other than Tier 2, which is what we’ll plot with the sub debt issue.

Peyton Green – FTN Midwest Securities

Okay, great. And then in terms of your regulatory exam framework, have you all been through that or is that forthcoming?

Jon Lorenz

We are just about ready to start. They're arriving actually on Monday, so that’s why Steve and I are going to New York on Monday. We aren't going to be here, but Rob Ostertag, our Chief Credit Officer, will be in charge for the priority [ph] exam. They are planning, I think, about a three-week exam at this point is what’s scheduled during August.

Peyton Green – FTN Midwest Securities

Okay. And then last question, you all had a pretty decent little uptick in 30-day past dues at the end of the first quarter. I was wondering if any of that was resolved. And then also the watch list, how does it look compared to what it might have looked like a quarter ago and I think–?

Jon Lorenz

On the 30 to 90-day category, Peyton, I think we’re about little over 1.00, 1.04, that they are 1.02 in the first quarter, we’re down to 84 basis points in that category. And in the second quarter it was down about 20% in terms of past dues. So, certainly not seeing an acceleration there. And I expect potentially even some additional improvement in the third quarter on past due. So, as the leading indicator of potential problems, we're not seeing any acceleration there at the past due. Overall watch list had been growing, as you know, fairly rapidly fourth quarter of last year, the first quarter, and then to the early part of the second quarter. We are seeing that now stabilizing. And as I mentioned, we are starting to see more rotation and we are seeing some credits being upgraded, some credits being paid off. So, as we are seeing some new credits come in, we are also seeing some credits move off of that watch list. And that’s really the phenomenon over just the last month, month and a half.

Peyton Green – FTN Midwest Securities

Okay. And I’m sorry I’m going to ask one more. But thinking about charge-offs going forward, what do you feel like the portfolio charge-off rate is? Is it close to what you did in the first quarter or is it somewhere between first–?

Jon Lorenz

I think charge-offs tend to lag somewhat the non-performing levels. I wouldn’t be surprised – again, I think the fact that we are under 1% today, given that we operate in Arizona on non-performers is just pretty amazing. So, I wouldn't be surprised to see non-performers move up some in the second half of the year and that the charge-off level again we consider the 3.6 million in the second quarter was attributed just to two credits. I can see that being somewhat volatile and the charge-offs being more in that higher end of the range in the second half, again, more due to the lag factor as those non-accrual, non-performing assets move into the charge-off category.

Peyton Green – FTN Midwest Securities

Okay. Great. Thank you very much.

Operator

Thank you. Our next question comes from Bain Slack of KBW. Please go ahead.

Bain Slack – KBW

Hi, good morning.

Jon Lorenz

Good morning, Bain.

Bain Slack – KBW

I have a question on I guess what you are currently seeing from the other vendors in Arizona. It sounds like you had a comment in the press release saying that that’s one factor with regard to what future loan loss provisions could be. And what metrics you focus on when trying to examine the liquidation of collateral from the other lenders?

Jon Lorenz

Bain, that’s really probably the biggest unknown factor out there right now and one hardest to get a handle on. In the big banks down there and there is one large independent bank that we think will be in a position during the second half of the year as they gain control over properties moving into OREO that we could see a lot of products hitting the market out of the banks. The offsetting factor there is we really are seeing a much higher level of buying activity going on, both from investors that are looking at more long-term hold propositions as well as, as I mentioned, also now from some builders that are stepping back into the market and buying lots again. So I think it will in part depend how much investor purchasing is taking place to absorb the properties as they come on the market, but versus three or four months ago, definitely a much higher level of activity going on in that market. But it's a little harder to assess what that supply and demand situation will be in terms of how much real estate comes on the market and then how much is being absorbed by buyers in the market. So that is somewhat of an unknown. I guess the other thing I'd add though, Bain, is given that from a land and lot standpoint, we’ve had value diminution 50, 60, some cases 70, 80%. I don't think there's a heck of a lot farther that it can go down if we have a decent level of buying activity taking place as the properties come on market. But certainly some further downside.

Bain Slack – KBW

Okay. And I appreciate that. I guess is there any color on the appraisal process during the second quarter versus what you all saw maybe in the first and fourth quarter?

Jon Lorenz

Still lower appraisals in the second quarter, but in terms of the portfolio, we’ve made a lot of credits that were only at 40%, 50% to 60% loan to value. So what we saw in the second quarter is loan-to-values moving up pretty significantly, but not dramatic changes from prior quarters, but definitely still further appraisal erosion in the second quarter. And I think we will probably still see that in the third quarter, maybe into the fourth. I think we will pretty well be through that by the end of this year though in terms of the appraisal erosion.

Bain Slack – KBW

Okay, great. Thanks.

Operator

Thank you. There appears to be no further questions at this time. I’d like to turn the floor over to Mr. Bangert for any closing comments.

Steve Bangert

Okay. I just want to once again thank everybody for participating in today’s conference call. I think you can tell by the tone of the meeting that we're pretty optimistic around here. I think we're feeling very good about our performance certainly relative to our peer group. And we expect that we will outperform the peer group especially on the credit metric side and – moving forward the remainder of this year and hopefully for the next several years. This is historically the way we perform. We’ve performed really well on the credit side. I don’t think that this year is going to be any different than that. Obviously we are operating in one of the more difficult markets in the country, in Arizona, but that is really a third of the franchise with two-thirds of it operating on a very strong – relatively strong Colorado market. I don’t want to overstate that. But on a relative basis to the rest of the country, I would say this is one of the best markets to be in. As always, if any of you have any questions, please feel free to give Jon, Lyne or myself a phone call. And thank you again for participating.

Operator

Thank you. This concludes today’s CoBiz Financial second quarter 2008 earnings conference call. You may now disconnect and have a great weekend.

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