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Edited Transcript of COBZ earnings conference call or presentation 28-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 CoBiz Financial Inc Earnings Call

DENVER May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of CoBiz Financial Inc earnings conference call or presentation Friday, April 28, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lyne B. Andrich

CoBiz Financial Inc. - CFO and EVP

* Scott E. Page

CoBiz Financial Inc. - CEO of Colorado Business Bank and CEO of Arizona Business Bank

* Steven Bangert

CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc

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Conference Call Participants

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* Brady Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Brett D. Rabatin

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Brian James Zabora

Hovde Group, LLC, Research Division - Director

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst

* John Lawrence Rodis

FIG Partners, LLC, Research Division - SVP and Research Analyst

* Timothy O'Brien

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good afternoon. My name is Lashonda, and I will be your conference operator today. At this time, I would like to welcome everyone to the CoBiz Financial First Quarter 2017 Earnings Conference Call. (Operator Instructions) Thank you. I will now turn today's call over to Lyne Andrich, Chief Financial Officer for CoBiz Financial. Please go ahead.

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [2]

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All right. Thank you and good morning, everyone. Before we commence with management comments today, I do need to remind everyone of our safe harbor disclosures.

Certain of the matters discussed in this presentation may constitute forward-looking statements for the purposes of federal securities laws, and as such, may involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of CoBiz to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

Additional information concerning factors that could cause our actual results to be materially different than those in the forward-looking statements can be found in our filings with the Securities and Exchange Commission, including Forms 10-Q, 10-K and other reports and statements we have filed with the SEC. All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

Also on today's call, our speakers may reference certain non-GAAP financial measures, which we believe provide useful information for 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.

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

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [3]

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Thanks, Lyne. Well, welcome, everybody, to our first quarter 2017 conference call. I'll be very brief, and then I'll turn it back over to Lyne to give you an overview of the financials, and we also have Scott Page, the CEO of the bank, here, who will give you an idea of the activity that we're seeing in both markets that we operate in.

If you saw last night, we reported earnings of $8.6 million or $0.20 per share versus $7.4 million or $0.18 per share same period of 2016. As many of you know that follow our stock, and you've followed it for a number of years or followed the company, that our business banking platform typically results in a seasonally slow first quarter. This first quarter really was not that much different than any other ones that we've had in the past. We did see some loan growth of about a little over $50 million, really all of that took place in March. In fact, if you look at the average loans for the quarter, you'll see that they're below where we finished the year by about $5 million. And so we were actually down during January and February for a while. And then we saw quite a bit of activity in March, and I think Scott will talk about what we're seeing now, because I do anticipate a very good second quarter in that.

Deposits typically first half of the year is tough for us, once again because of the business banking platform. It was pretty flat. I think were up about $20 million during the first quarter. Second quarter could be a little rough on us as our business owners pay their taxes and distribute profits and that, but we'll see how that plays out. But we're anticipating good deposit growth again during the second half of the year.

One thing I wanted to mention, you may have noticed that our investment portfolio has increased by about a little over $100 million during the last 2 quarters. We had taken it down to around 13.5% of earning assets, and I think it's approaching 16% of earning assets today. And that was just a decision that we made as the interest rates started to increase, as they were creeping up. As you know, we are a very asset-sensitive franchise. We took that opportunity to extend our investment portfolio a little bit and add to it. We're pausing for now because rates really have come down 30, 35 basis points since the middle of March in that. And, so I don't know if you'll see an increase in the second quarter or not. Right now, I don't anticipate that, unless we see the yield curve itself kind of shift itself back up. But that was -- worked out real well for us because we were able to take advantage of higher yields in that.

Still, the investment portfolio, the duration on that is about 2.5 years. So we still don't have a lot of extension risk in that portfolio.

As far as our longer-term goals, we've been very visible about and -- what those are. We're looking for 10% loan and deposit growth, 8% noninterest income growth and, hopefully, holding our expenses at 4% or less. And I thought maybe I'd go over those before I turn it over to Lyne.

If you look at both loans and deposits over the first quarter of the last year, that they have -- essentially 10% deposit and loan growth, almost as if we'd manufactured it just that way. But we're just -- it happened to work that way. Noninterest income is a little over 8%. So we're pleased with that. Unfortunately, operating expenses were up about 5%. I think Lyne is going to talk about that. I think we've -- that's something that we think we can get under control over the next 3 quarters in that.

I am pleased, though, because those goals, if we hit those goals, and we're pretty much right on them, we should be able to increase our operating earnings or our pretax, pre-provision earnings at double-digit rates. And in fact, when I've looked at our pretax, pre-provision earnings over the first quarter, we're up about 13%. I'm hoping that will accelerate over the next few quarters in that. But overall, I was pretty -- I'm pleased with where we're at right now. We've got a very active pipeline of activity, a lot of new hires, I know Scott's going to be talking about that. Probably one of our more active quarters we've had in a long time.

So overall, I'm very optimistic as we head into the remainder of the year. Both markets are performing very well for us in that. And it's right now, I think, CoBiz is operating about as well as we have in several years in that.

So I'm just going to turn it over to Lyne and let her give you an overview of the financial results, and, as I said, Scott will then give you an update on our markets.

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [4]

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All right. Thank you, Steve. As we mentioned last night, we reported net income available to common shareholders of $8.6 million for the first quarter, or $0.20 per share, with an ROA for the quarter of 96 basis points and a return on equity of 11.4%. As Steve mentioned, our first quarter is typically seasonally softer, but we did feel good about the year-over-year growth that we showed, with net income increasing 17%, driven by strong balance sheet growth, an expanding net interest margin and good fee income.

Expenses were a little higher than we projected, and I'll touch on that in a little bit more detail in a moment. However, we had a favorable tax rate in the period that helped offset some of the higher expenses we saw.

Just talking to the margin for a second, we did get a lot of good support for our top line revenue in that we had healthy growth in average loans and deposits over the prior year. And that allowed our net interest income on a tax-equivalent basis to increase at an annualized rate of 8.4% to $32.5 million for the quarter from the first quarter of 2016. Our NIM expanded 4 basis points from the prior year period to 3.77% this quarter and 2 basis points from the fourth quarter. And as Steve mentioned, we did allow our investment portfolio to run off during most of 2016, but we did put on more security trades in the first quarter of this year. And so the change in that earning asset mix slightly dampened the linked-quarter margin expansion we might have otherwise saw if balance sheet composition had stayed the same.

The only -- the other thing I'd point out on the margin is on the liability side. We continued to benefit from a very high level of noninterest-bearing demand deposits, which still comprise over 43% of our total deposits today.

Touching on provisions quickly. Asset quality continues to be really stable, and we have a very low level of nonperforming assets to total assets, which at the end of the quarter was at 22 basis points. We did record a net recoveries during the period of $311,000. So overall, we booked a $607,000 provision for loan loss, which maintained our relatively consistent allowance-to-loan coverage of 1.15% compared to 1.13% last quarter. So on the asset quality side, things are very stable.

Looking at noninterest income, our fee income. Our fee income continued to be pretty solid, with total noninterest income increasing 8% over the prior year quarter. On a linked-quarter basis, we did see fee income contract, but that was from an exceptionally strong fourth quarter. I think we discussed in the fourth quarter that we had some very strong revenue inflows from the sale of interest rate swaps to our clients, and that's reported in that other income category within the press release. As well as we saw a reduction in income recognized from mark-to-market accounting on our swap portfolio. So those 2 items contributed to the linked-quarter contraction. Outside of that, I feel pretty good about the direction and the momentum we have with our fee income.

Expenses. The year-over-year increase in expenses was higher than I would have liked. And it was greater than the 4% or less target that we have set for ourselves. As you know, controlling expenses is a key initiative for us, and we've spent a fair amount of time analyzing the trends in our noninterest expenses. Some of the expense variance in the first quarter can be attributed to timing, particularly in the employee benefit and marketing areas. So as Steve mentioned, we expect expenses from these areas to moderate over the balance of the year.

Importantly, as key to managing our overall expenses, increases to 4% or less will be containing our compensation costs. And we remain really focused on managing our total headcount. FTEs as of the end of March were 500 -- forgive me, 529.9 versus 532.7 at the end of the year. So we've been really careful in managing total headcount.

In addition, many of you know that we give annual merit increases at the beginning of the second quarter each year. So this year, we set a goal of capping total base salary increases to no more than 2%. And I'm pleased to report, we were successful in meeting that goal in large part due to us holding base salaries for our highly-compensated people flat since that group should be really rewarded through their variable compensation program, and that's where they get their upside. Overall, nearly 20% of our top compensated officers didn't get salary adjustments this period. So this allowed us to contain our total wages while still providing healthy market adjustments to the vast majority of our staff.

Factoring this in, I remain really confident that we will see our total noninterest expenses coming back in line over the balance of this year, and that we can still achieve our goal of holding expenses to 4% or less over 2016 levels. However, I should qualify that this is before the impact of a new asset base lending group that we have. Scott will discuss in more detail, but we were successful this period in lifting out a complete ABL team late in the quarter. And all 5 new employees have joined us. The group is expected to be cash flow positive in 2017 and nicely accretive thereafter. However, the initiative will likely increase our noninterest expenses this year anywhere between $675,000 to $775,000, which was not anticipated in our 4% goal for 2017. However, we are all really excited about this new venture, and Scott will provide some more background on the new business line in a moment.

Lastly, I'd just -- I'd like to just touch on our tax rate. As I mentioned, it did benefit us in the first quarter. The effective tax rate for the first quarter was 19% compared to 24% in the prior year period. The majority of this decrease relates to the adoption of ASU 2017-09, a relatively new accounting standard, which provides for excess tax benefits related to payroll taxes paid by employees upon divesting of restricted stock to be deducted by the company. The vast majority of the company's equity awards vest in March of each year, so the impact is amplified in the first quarter. Overall, we had a $506,000 credit to tax provision related to excess tax benefits this year versus $115,000 in the first quarter of 2016. So that was a really good benefit for the first quarter.

However, going forward and in future quarters, I expect our effective tax rate to revert back to 24% to 25%.

So that's the end of my prepared comments, I'll pass it over to Scott now.

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Scott E. Page, CoBiz Financial Inc. - CEO of Colorado Business Bank and CEO of Arizona Business Bank [5]

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Thanks, Lyne. Good morning, everyone. Lyne stole my big finish on the asset-based lending story, but I will -- I'll talk about that a little bit more.

So I was actually really quite pleased with the first quarter. We had reasonable loan growth in loans and deposits. Steve talked about our seasonal softness in the first quarter and second quarter for deposits, so I'll talk about that a little bit more. And then I want to share some additional information about the asset-based lending group and then talk about some other exciting news on some really high-quality producers that we picked up during the first quarter. So it was a busy quarter in a lot of ways.

So we had, as Steve said, pretty good loan growth in the first quarter, of $53 million. That compares very nicely with the same quarter of last year, when we had $17 million of loan growth. What that doesn't really show is we had 2 or 3 big payouts that occurred in the first quarter, actually in January, that we thought were going to happen in December. So we're grateful to have the extra earnings, but it did kind of put us in a hole to start the quarter. But as Steve said, we really have been doing well since January and particularly March and through April. So we feel pretty good about the production that we've got going on right now.

The loan pipeline is robust, and I expect our current loan growth trends to continue. Second quarter typically a good quarter for us, and all 3 quarters -- those last 3 quarters of the year are usually pretty good. So right now I'm feeling good about meeting our loan growth goal of 8% to 12% for the year.

I also feel good about the broad-based growth that -- in C&I and the term real estate categories. And again, I feel good that both Arizona and Colorado are doing real well. As I study their pipelines and I study the activity in both states, it's looking pretty good right now.

So as Lyne said, right near the end of the quarter, we were successful in lifting a very high-quality 5-member asset-based lending team out of a local regional bank. This team is very well known to CoBiz and we've been referring business -- ABL business to them for years. Previous to their most recent bank, the leader and most of her team had been at Wells for over 20 years. So they know the Denver market and the asset-based lending space very, very well. It's a very exciting acquisition of talent for CoBiz because asset-based lending fits very, very well within our C&I franchise for both states.

It allows our bankers and our bank to acquire clients sooner and retain them longer, which is very, very important to us. The pricing profile of these clients is also very appealing to us, and we've already seen a big uptick in referrals from our commercial bankers to our ABL group. And on top of that, this ABL group brought a nice, healthy pipeline with them. So Lyne talked about some of the financial metrics associated with that, but it's a very nice fit for us. And culturally, they're blending in very, very well.

So aside from the ABL lift up, Steve mentioned that we had hired some high-quality producers in the first quarter. And many of these, we had been recruiting for quite some time, and it just happened to hit in the first quarter. And a couple of them were pretty opportunistic. They just came up because of turmoil wherever they happened to be. And so most of the bankers are in Colorado, but 2 of them are in our Phoenix Metro market, actually 2.5. One of them is a part-time retired banker that came from Wells Fargo that's going to help us produce a lot of new business. They're all veterans, and they're all proven producers, and all of them came from very respectable banks, including Wells Fargo, Zions, BBVA Compass, Alliance Bank, UMB and Silicon Valley Bank. And I believe strongly that once these bankers get acclimated, they will all drive quality deposit and loan growth for years to come.

Speaking of the deposit front, I was pleased with our growth of $20 million, similar to the first quarter we had last year. And typically, the first quarter's -- first 2 quarters for us are soft quarters for deposits given the nature of our business, professional, healthcare and contractor customer base. For example, a lot of our contractors start up business in the first quarter of every year. And as I went through the list of deposit outflows, there's quite some very large outflows for some of these big contractors as they are starting new business. As you know, both of our markets are very healthy right now when it comes to growth in construction.

But many of our clients also make distributions for bonuses and taxes in the first 2 quarters. So for us to show deposit growth indicates the positive results we are getting in acquiring new customers, especially deposit-centric customers. As Lyne mentioned, we continue to grow our Treasury and operating business and this is reflected in our deposit mix of 41-plus noninterest-bearing deposits. Deposit growth is a major component of each banker's incentive compensation, and we put great emphasis on deposit growth in our pipelines and sales meetings.

And last but certainly not least, even though there's not a lot to say about it, our asset quality remains very, very strong, and we feel very comfortable with our loan loss reserve coverage. You can see all the statistics in our release. All asset quality measures remained at or better than our prior linked quarter. Of greater importance, there aren't any negative trends that we can see right now emerging in the portfolio or in the Colorado or Arizona economies. Both markets are very healthy and projected to remain that way for the foreseeable future.

So with that, I'll turn it back over to Steve.

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [6]

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Okay. Well, I think, we're just going to open it up for questions right now. Lashonda, we'll take questions if you have any available.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have a question from the line of Brady Gailey with KBW.

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Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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So just a follow-up on the new hires. I mean, it sounds like there's 5 of them with the ABL Group. Can you quantify the other, the number of hires that were added this quarter outside of the ABL guys?

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Scott E. Page, CoBiz Financial Inc. - CEO of Colorado Business Bank and CEO of Arizona Business Bank [3]

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It was, let's see, 5 in ABL, 3 in Arizona and 3 in Colorado.

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Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

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Okay. And then it sounds like, given the current yield curve, you're not really going to be adding much to bond balances. But I mean, as you look longer-term and as rates drift higher, the bond book is 15% of average earning assets now. But longer-term, where do you think that percentage should be?

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [5]

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Brady, I think it could drift up to around 20%. But we will -- really what we'd like to do is continue to extend on the investment portfolio as rates do drift up. And as you know, on the very short end, rates have adjusted up. And we kind of watch the 5-year, to be honest with you, as kind of where we're looking to invest between the 3- and 5-year area. And the 5-year was up around 2.15% in the middle of March. And today it's been trading around 1.80%, 1.85%. So we'll probably sit on the sidelines till it's somewhere well over 2% before we start adding it again. But we have the capital to do that. We'd like to increase the size of the investment portfolio. And so longer-term, but I don't know what the timing on that would be, I could see it drift up to around 20% of earning assets.

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Brady Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

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Okay. And did your asset sensitivity position change much in the first quarter?

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [7]

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Lyne, do you want to comment on that? I mean, a little bit but not significant.

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [8]

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Yes. We still show and present a really asset-sensitive balance sheet. But it did dampen a little bit from, like, the end of the year. So we show up 200 basis points. Last year, we would have reported an NII like 4%-plus expansion, now it's 2.5%.

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [9]

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And that's in the first year. In the second year, we'd be...

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [10]

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That's in the first year. Second year, it ramps up significantly more. It's like 16% year 2, and now it's 12% year 2. So a still very asset-sensitive profile, but it did dampen some.

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [11]

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And then why the second year is important is, if you remember -- our balance sheet -- a lot of people pay attention to the floating rate loans, which are about $1 billion out of the $3 billion are floating and adjust up with rates. But remember, 40% of our loan portfolio pays off every year. So we have the opportunity to reprice 40% over a 1-year period of time as it pays off and gets rebooked.

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Operator [12]

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Our next question comes from the line of Brian Zabora with Hovde Group.

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Brian James Zabora, Hovde Group, LLC, Research Division - Director [13]

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I have a question on the ABL group. Do you have any sense on how big this portfolio could get? And maybe just the profile of types of credits, maybe being size, yields and what would you think the -- kind of the credit profile would be?

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [14]

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Maybe I'll take both those questions, and I'm going to pay back to Lyne, and she can decide how big the portfolio is going to be.

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Scott E. Page, CoBiz Financial Inc. - CEO of Colorado Business Bank and CEO of Arizona Business Bank [15]

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Yes, she'll correct him if he's wrong.

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [16]

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Whenever I take numbers, she gets real nervous, so. We're really seeing some really nice yields, Brian, the ones we've looked at have been prime plus 4, prime plus 5. The deal sizes are right in our sweet spot. We're not trying to hit home runs with this group; we're trying to hit deals maybe $3 million to $10 million in size. And so, so far, that's where they're all coming in. And I met with the head of the group yesterday, her name is Deb Tracy, a real veteran. And we went through her pipeline. And she's got a very nice pipeline and they're all falling in about that yield size. The other thing I'd say though, they know how to get paid for the administration of this portfolio. There's a lot of really good fee income that they pick up when they put on a new customer. And then we get a real nice side benefit. You don't get a lot of deposits out of the group but you get a lot of treasury management out of the group, because they actually reapply their deposits on a daily basis, typically. But the fee income and the treasury management income on these deals, because almost everyone of them uses lock box, it's really, really good. But I think we're looking for about $50 million in growth, maybe, approximately this year out of that portfolio. But, Brian, I don't think it will be ever be more than 3 -- 2% to 3% of our overall loan portfolio.

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Scott E. Page, CoBiz Financial Inc. - CEO of Colorado Business Bank and CEO of Arizona Business Bank [17]

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Yes. We just like it because it allows us to acquire a clients sooner and then -- and if they get into little bit of trouble, then we can move clients into her group and still make a nice return from a rich reward standpoint.

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Brian James Zabora, Hovde Group, LLC, Research Division - Director [18]

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That's great. And then I've got a second question on expenses. You mentioned the expense -- additional expenses with this group. Is the 4% goal, outside of that, also take into consideration the several additional hires that you made on the revenue side?

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [19]

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Yes, that's factored in there. So we are being opportunistic. And Scott, when he can, has been recruiting talent. But that said, excluding the 5 from the ABL team, our headcount was still down 2 or 3 individuals from year-end, even with those new hires that Scott referenced. So again that's a real big focus and priority for us. So I can't promise that every quarter that will be the same. We'll have to take advantage of opportunities when they present. But the mantra here has been if we add to the top line, we've got to really look very hard at maybe those that aren't performing and take action on those. So...

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Brian James Zabora, Hovde Group, LLC, Research Division - Director [20]

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And then just lastly, on insurance revenues. I think year-over-year, the growth was kind of a little bit lower than I was expecting. Just kind of your outlook on that business. Because I think at the end of the year, the pipelines looked pretty good.

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Scott E. Page, CoBiz Financial Inc. - CEO of Colorado Business Bank and CEO of Arizona Business Bank [21]

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Yes, I feel good about the pipeline. We had a couple of large clients get acquired in the business, and so it really hurt us in the first quarter. So we're working hard to replace that business and then grow it above that, obviously. So I'm still pretty optimistic on the business, Brian.

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [22]

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And those came out of our employee benefit group and they really do have a robust pipeline of activity in that. But those 2 clients did hurt.

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Operator [23]

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Our next question comes from the line of Brett Rabatin with Piper Jaffray.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [24]

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I wanted to, I guess, first, ask on the margin, from here, would it continue to creep up a little bit with the March rate hike, in your view? And are you seeing deposit betas do anything in terms of competition? And then just lastly, as rates moved a little higher, what's been the response from the competition? Have credit spreads held? Or what's been your general feel on that?

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [25]

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Well, I'll start off with that and I'll let Lyne and Scott jump in with that also. But, yes, we should see some benefit from rising rates -- the rate increase in March and that. And we didn't really get to -- the majority of our loans reprice on a monthly basis, so we'll start to see that in April. One thing I do want to caution people about though, is deposit runoff during the second quarter can be brutal. And I'm not sure what is going to be. We may finish up -- we may be flat for the quarter, but I wouldn't be surprised if we're down a little bit. And why I bring that up is the composition of the balance sheet has a lot to do with the margin. So I would anticipate loan yields would drift up, but we may -- on the liability side, you may see us use other borrowings as deposits run off, as we fund all the loan growth that Scott is anticipating over the next 2 quarters. Deposits will catch up by the end of the year. And overall, that margin -- we should see some expansion in the margin as a result of that. And then again, on the investment portfolio activity, that's not going on at the same margin as what loan bookings are. And that's hard to forecast where that's going. So I know I'm kind of waffling back and forth. We're pleased with the rate increase, it definitely will help us on the loan yield side. On deposit pricing, we haven't adjusted pricing and really have not seen our competitors adjust pricing, with the exception of maybe some of the community banks. But we often say our competitor is Wells Fargo. So we pay attention to what Wells is doing. Wells has not moved, and consequently, we have not moved. And I don't think there's any pressure from the business customer today to increase deposit rates. Scott, do you have anything...

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Scott E. Page, CoBiz Financial Inc. - CEO of Colorado Business Bank and CEO of Arizona Business Bank [26]

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Yes, I think -- I completely agree. I would also say that our deposits come from the operating deposits of our clients, and we keep adding more and more C&I and not-for-profit operating business. And so we don't feel right now any pressure on the deposit side. A couple of our private bank clients certainly are more sensitive. But for the most part, the bulk of the portfolio is a result of treasury and operating business.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [27]

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Okay. And then obviously asset quality remains very good, but this is kind of the first quarter you've had a tick up in the provision. Assuming things stay the same, would it be fair to assume you kind of provision 1% for growth? Or any thoughts on reserves/provision?

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [28]

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Yes. And that's really hard for us to project, because it is going to be a function of the nature and the character of the kind of new loans that we book. But I do expect that we'll be in a provisioning need for the growth that we have. That said, we saw -- we did benefit from some recoveries this period as we continued to work, actively, those charge-offs we had years ago. And so some of those come to fruition, and we're getting recoveries that help support the need for our provisioning for growth. Absent that and absent any changes in the market, I suspect you should just look at keeping some of our allowance coverage to loans relatively static, that's how we're viewing it. That's the best I can guess at this point.

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Operator [29]

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

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [30]

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I just wanted to clarify on the expense side, the ABL team was hired, I think, you said late in the quarter, so I assume not a meaningful impact to first quarter personnel expenses. But the other, I think 6, adds, were they more fully impactful to the quarter? In other words, I'm just trying to -- you don't usually have that much of a seasonal fluctuation in first quarter personnel expense. So this was a little bit of an outlier.

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [31]

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Yes, a little bit. So, no, and you're right, the ABL team had a very insignificant impact to first quarter expense run rate. The headcount, in general, were almost level, but they were a little bit more expensive headcount than some of the replacements that we had. So it influenced it a little bit. We just had more issues or timing issues with some of our medical-related benefit costs of that, the timing of it, that we had some outflows or expenses incurred in the first quarter when, historically, we've done them in the second quarter. So that kind of impacted first quarter. Vacation expense usually goes up a little bit, and it did this quarter again. So those are the kind of things that were influencing the first quarter run rate. Looking forward, I do feel a lot more comfortable. Ex the ABL investment and the initiative there, we should see quarter-over-quarter increases come down pretty -- from where they were in the first quarter.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [32]

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Okay. But that's not including the impact of the ABL team, correct?

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [33]

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Yes. The ABL team is on top of that. So that I mentioned the 6 -- $700,000 that we're projecting of that overhead is not included in that 4% run rate.

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [34]

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Yes. Three producers and 2 support people is what it works out to be.

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [35]

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And then there's a little bit of system costs and the incremental costs, but yes. (inaudible) that doesn't factor in obviously the -- we do expect them to be cash flow positive this year. I say cash flow positive because we're still working through what the provisioning might look like on those new assets they're bringing over. But year 2, certainly, they should be very profitable for us.

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Operator [36]

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(Operator Instructions) Our next question comes from the line of John Rodis with FIG Partners.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - SVP and Research Analyst [37]

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Lyne, just to beat this expense thing to death. You said $675,000 to $775,000 for ABL, is that for the rest of the year? Or is that a full year run rate?

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [38]

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That's the full year 2017 anticipated impact.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - SVP and Research Analyst [39]

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Okay. So basically, for the next 3 quarters if it didn't have much impact in the first quarter?

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [40]

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Correct.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - SVP and Research Analyst [41]

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Okay. One other question, I guess, maybe for you, Lyne, on fee income. It looks like deposit service charges and investment income had pretty nice bumps relative to the fourth quarter. Was there anything special going on there? Or are these better run rates going forward, given some of the initiatives you guys have had focusing on fee income?

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [42]

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Sure. Scott wants to take deposits, and I'll correct him. I'm just kidding.

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Scott E. Page, CoBiz Financial Inc. - CEO of Colorado Business Bank and CEO of Arizona Business Bank [43]

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Well, she's not kidding. We did -- we put a price increase in place in the fourth quarter and it had a material impact, John. And then we have a very nice treasury pipeline as well. So you're seeing, it's a combination of the price increase and acquisition of new clients.

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [44]

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That's right. And I would agree with that. So I think you have a good run rate looking at the first quarter results. And that year-over-year is a true reflection of the improvement we saw there. We've also been very -- a lot more disciplined about waivers in really looking at our deposit service charges that we have and making sure they're at the market. Investment advisory fees, I think you mentioned, too. That's also a good run rate as well. That's just based on the AUM and the inflows they've had. They've have some good success the last several quarters in building that book of business. And the market certainly is helped, fourth quarter carries into the first quarter, as well, in terms of valuations and how we get paid on those AUMs. So unless there's a major pullback in the market, and we do bill at the end of the period. So unfortunately, we won't know till like the end of the quarter what the valuation of those assets would be. But absent any major changes in the market, that's a good run rate growth rate for us.

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John Lawrence Rodis, FIG Partners, LLC, Research Division - SVP and Research Analyst [45]

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Okay, great. And then just one other follow-up, Lyne. You said the tax rate, 24% to 25% going forward. I guess that's a little bit lower than last year. Is that just because of the growth in the securities portfolio?

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [46]

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It's more the public finance portfolio we have, that most of those are reported as loans, not so much the investment portfolio. But yes, that's a good run rate as well.

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Operator [47]

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

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [48]

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Well, Rodis stole my questions, but I'll deal with it offline. I can come up with a couple of others. Can you give a little update color on the construction lending business. With the construction season kind of picking up, weather picking up? What's your outlook?

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [49]

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Well, I think our outlook's still very positive. But we'd like to do more in Phoenix, Tim. That's -- we're really focusing our energy there. We feel like we've got the Denver market covered pretty well. So we had it in the first quarter, we had a number of constructions loans move into our permanent portfolio. So I still feel very bullish. We have an incredibly busy construction team right now, keeping it staffed has been a challenge, and -- well, still very bullish on that.

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [50]

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Yes, because we saw commitments -- oh, forgive me. We did see, in the quarter, our commitments alone from the fourth quarter up almost 5%. Not -- that's not annualized. So we are seeing good traction there. And of course, that takes a while before they start drawing into those lines.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [51]

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But here second quarter, third quarter, a decent chance we'll see increase in fundings in that segment?

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [52]

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Yes.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [53]

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Great. And then I'm going to go out on a limb here with Lyne. The salary and benefits line item, $19.12 million in the first quarter. Lyne, can you tell me how much of that was base salary?

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [54]

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So as I look at it, the amount that was what I consider considered fixed salaries was $12.5 million.

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Timothy O'Brien, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [55]

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And that's the part that gets adjusted up for merit?

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Lyne B. Andrich, CoBiz Financial Inc. - CFO and EVP [56]

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Correct. Yes, that's the amount that is fixed in the -- goes through our annual merit increase.

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Operator [57]

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There are no additional questions at this time.

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Steven Bangert, CoBiz Financial Inc. - Chairman of the Board, CEO, Chairman of Cobiz Bank NA, Director of Cobiz Insurance Inc, Director of Alexander Capital Management Group Llc, Director of Cobiz Gmb Inc, Director of Financial Designs Ltd and Director of Colorado Business Leasing Inc [58]

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Okay. Thanks, Lashonda. Well, I just want to thank everybody for participating in the phone call. If there's any questions, please give myself, Lyne or Scott a call. We're looking forward to the remainder of the year, there's quite a bit of activity in both markets. And also hoping for a rising rate environment. Things look pretty good at CoBiz.

So thank you for participating today.

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Operator [59]

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This concludes today's conference call. You may now disconnect your lines.