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Edited Transcript of COBZ earnings conference call or presentation 27-Jan-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 CoBiz Financial Inc Earnings Call

DENVER Jan 27, 2017 (Thomson StreetEvents) -- Edited Transcript of CoBiz Financial Inc earnings conference call or presentation Friday, January 27, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lyne Andrich

CoBiz Financial Inc - CFO

* Steve Bangert

CoBiz Financial Inc - Chairman & CEO

* Scott Page

CoBiz Financial Inc - CEO of Colorado Business Bank/Arizona Business Bank

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Conference Call Participants

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* Brady Galley

- Analyst

* John Moran

Macquarie Research Equities - Analyst

* Alex Morris

Sandler O'Neill - Analyst

* Brian Zabora

Hovde Group, LLC - Analyst

* John Rodis

FIG Partners, LLC - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the CoBiz Financial fourth quarter earnings conference call.

(Operator Instructions)

Thank you. I would now like to turn the conference over to Lyne Andrich, Chief Financial Officer. Please go ahead.

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Lyne Andrich, CoBiz Financial Inc - CFO [2]

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Thank you, Angela, 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 the Federal Securities Laws. And as such, may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

Additional information concerning factors that could cause our actual results to be materially different than those in the forward-looking statements can be found in our filings with the Securities and Exchange Commission, including Forms 10-Q, 10K 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 number to GAAP results are included in our earnings release which is available on the Investor Relations page on our website.

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

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [3]

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Thanks, Lyne, and thanks everybody for participating today. I will talk briefly about 2016, and then I will let Lyne Andrich, our CFO, talk about the quarterly results and do a deeper dive into the numbers. And Scott Page, the CEO of the Bank, is here to give you a little bit of color of what's going on in the Bank today.

Last night, we reported our financial results. If you saw the numbers, for the quarter it was $8.7 million versus $4.4 million in the same quarter of 2015. But more importantly, for the year the earnings were $34.9 million versus $25.7 million for 2015. Scott and Lyne will spend more time on the quarter.

So I want to step back and take a moment to give my overview of 2016 and maybe briefly touch on what our focus will be in 2017. Many of you may remember as we headed into 2016, we discussed some important financial goals that we had communicated internally with all of our employees. But we also shared those goals with the street.

You often have heard us refer to those goals as 10-8-4, or more specifically we're targeting 10% deposit and loan growth, 8% non-interest or fee revenue growth while trying retain our expenses at 4% or less. Although these are annual goals, they're really part of our 3 to 5 year plan.

I don't get overly concerned with a small miss for one goal over a calendar year or any fourth-quarter period. I do however believe our results need to average near the financial goals if we want to continue to grow our pretax pre-provision earnings, which I will sometimes refer to as core earnings, really at double-digit growth rates. This will allow us to improve our efficiency ratio and really benefit from improved operating leverage.

But most importantly, we want to show strong EPS growth for our shareholders. This is going to be critical if we want to retain our independence. Every employee at CoBiz is aware of these goals and goal setting is easy, but really the execution of those goals is the challenge.

So I thought I'd step back and look at how we executed in 2016. First, the 10% deposit loan and goals, if you look at the period-ending numbers, loans were up 8.7%, deposits 10.5%. I also look at the averages, and if you look at the averages for 2016 versus the averages for 2015, I believe loans were up about 11% and deposits were up about 9.5%.

All those metrics are within tolerance that I think is acceptable. The deposits were really the most gratifying because we put added emphasis on deposit gathering during the last year. Today, our non-interest-bearing deposits make up 42% of the overall portfolio, and interest-bearing demand deposits also make up 23%.

So you add those together, 65% of our savings portfolio is made up of those two categories. The rest of it is primarily money market accounts, with only 4% of the deposits are in the CD category today.

I think this portfolio will prove to be very valuable if in fact we are heading into a rising rate environment. We continue to have an asset-sensitive balance sheet and look forward to that day if in fact it does materialize.

I'm also pleased with the level of loan activity in both Colorado and Arizona. Both states really have strong economies and offer opportunities to bank high-quality companies.

Also all the banks today show excellent credit-quality results. But I think it's important to note that we have not really ventured into new asset classes where we have little prior experience, nor have we purchased asset-generating platforms or have we bought participations from banks in different parts of the country just to show loan growth.

We've occasionally buy an in-market loan participation from a local bank, but we overall are a net seller of loan participation. So we are very careful there. I don't think we've stretched to do deals.

We've worked hard since the great recession to reduce the overall risk profile of our portfolio. We've invested primarily in the short end of the yield curve. Many of our loans are adjustable, and as you know 40% of our loans payoff annually which is once again going to set us up really well if in fact we are heading for a rising rate environment.

Moving on to non-interest or fee income, which we have an 8% goal. For the year, our fee income was up over 11%, so I'm very pleased with that. We did benefit from some equity investments in mezzanine funds, but that was a very small part of it. I'm really pleased with the activity I'm seeing today from the insurance and wealth management platforms, as well as the Bank which is still one-third of our overall non-interest income.

Finally, expense management. This is an area that we've made great strides over the last two years. Most of these efforts have been led by Lyne and Scott, and I know Lyne is planning on spending some more time with our expense numbers so I'll let her do that.

The end result though from setting and more importantly hitting our goals is to really grow our operating earnings at double-digit rates. And as I calculate our operating earnings and look at it year over year, the operating earnings increased 10%. That's not spectacular.

But if you look at the second half of the year, the second half of 2015 versus the second half of 2016, operating earnings were up over 22%. And really the disconnect there is in June of 2015, we issued $60 million of sub-debt and that did distort the comparables for the first half of the year.

But when I look at the second half of the year, and both second half of the year's have that sub-debt expense in it, I am confident that we are executing, we are hitting the numbers that we want to hit. If we continue to do that, I think will be very pleased with the results in 2017.

Overall, I'm pleased with where we're positioned today. I believe our capital structure is very efficient. Our goal is really to retain our tangible common equity between 8% to 8.5%.

Behind that is $60 million of sub-debt issued that I mentioned that we completed last year. Lyne had decided to issue longer-term debt than most of the financial institutions did, cost us a few extra basis points at the time, but today that looks like a very good decision. We also have $70 million of trucks that we've hedged with a [lider] of swaps that mature between 2020 and 2024.

So I remain very optimistic of where we're sitting today. I think we're executing at about as well a level as I've seen CoBiz ever execute, and yet I don't think we're taking on more risk than what I'm comfortable with in that. I'm looking forward to 2017, and I think you'll be pleased with our numbers.

I'm going to turn it over to Lyne and let Lyne talk about the financial results.

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Lyne Andrich, CoBiz Financial Inc - CFO [4]

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All right. Thank you, Steve.

Last night, we reported net income available to common shareholders of $8.7 million, which is $0.21 per share. That did translate to a return on average assets for the quarter of 98 basis points, and a pretty healthy return on average equity of 11.6%. The quarter was highlighted by strong balance sheet momentum, a stable margin and good fee income.

Just to touch on top-line revenues for a second. The healthy growth we saw in our earning assets and our core deposit base allowed our net interest income on a tax equivalent basis to increase at an annualized rate of 9% to $32 million for the quarter from the third quarter. So I was really pleased to see what that growth in that momentum and we had in top-line revenues.

Overall, our earning asset mix didn't change significantly. And you will see that our loans remained at approximately 84 to 85% of our total average earning assets. And on the liability side, as Steve mentioned, we continue to benefit from a really high level of non-interest-bearing demand balances, which on an average basis comprised about 44% of total deposits for the period.

Our NIM was very stable from the linked quarter. As we mentioned, we remain very asset sensitive, and the fourth-quarter margin of 3.75% does not fully reflect yet the impact of the latest rates height we saw in mid December. So we feel good about how our balance sheet is positioned going into 2017.

To talk to the provision for second, Scott can speak to credit quality in more detail. But asset quality continues to be strong, and loan growth for the quarter coupled with a net charge off of about $585,000 did drive a modest provision for loan losses of about $350,000, just under $350,000.

Non-interest income, following a very strong third quarter we had another good quarter for fee income this period. You may recall in the third quarter we had an exceptional amount of income recognized from investments in SBIC meds funds which we report under equity method investment.

In the fourth quarter, our med fund income reverted back to more normalized levels. We've discussed in the past, we average $300,000 to $500,000 a quarter from income on these investments. So in total for 2016, we recognized $2.5 million of income from these equity method investments.

2016 was also a really good year for fee income on the sale of interest rate swap to our clients, which is reported in the other income category within the release. In the fourth quarter, we earned $689,000 in fees from the sale of swaps, bringing the full-year amount to $1.243 million from interest rate swap fees. And then lastly, the increase in rates in late 2016 did benefit non-interest income by $737,000 in the fourth quarter from a positive mark-to-market adjustment we took on our derivative portfolio.

Turning to non-interest expenses, we did see an increase of $1 million from the third-quarter run rate. But mainly it was due to compensation expense and variable compensation expense given the strong fourth-quarter production we saw. As well as a little bit from higher seasonal claims on our self-insured medical plan, as employees who had already met their annual deductible strove to get their expenses into this plan year.

For the full year, however, our NIE increased by $5 million or 5%, which was greater than our 4% target. However I should know and I think it's important to see that our fixed salary expense was really well contained, and on average increased only 1.6% over 2015.

We remain really focused and disciplined on managing our overhead, particularly our headcount. Our FTEs as of the end of 2016 were at 532.7, and that compares against 531.8 at the end of 2015. So we've been really judicious in making sure that we're careful with our headcount ads.

Variable compensation, which includes the bonuses as well as commission-based salaries. While we saw a fourth-quarter uptick in the third, year over year it only increased 1.1%. So that's been very well contained as well.

However, pushing us over that 4% goal, as I mentioned, were a couple of other items of note. One was an increase of approximately $500,000 over 2015, due to a few larger claims that hit our medical plan in the early part of the year. Medical expenses in total were $5.1 million in 2016 versus $4.5 million in 2015.

And two, the other item related to an increase of about $570,000. In our 401k matching, we have a mechanism here at CoBiz where the matching steps up when the Company achieves a return on average assets greater than 1% and for the full year we were like 1.02%.

And lastly, we recognized a significant increase in occupancy expenses during 2016 which was anticipated, and related to the relocation of our corporate headquarters. During the relocation process, we've mentioned our occupancy expenses were elevated as we incurred rent on two locations during that transition.

However, we have been really focused on maintaining and containing our facility and occupancy costs. We've never really had an expansive branch network, as many of you know, but we still work hard to find efficiencies and we've consolidated offices where we could. Over the last five years, we've closed 7 banking offices and we're now down to 15 banking locations today into both markets.

Overall though, for the full year, as Steve mentioned, we did see an improvement in our efficiency ratio. We drove it down to 66.8%, and for the fourth-quarter run rate it was at 65.6%.

So overall, we still are committed to managing our ongoing expenses to within 4%, as Steve mentioned, realized on an annual basis. And I'm really looking forward to seeing the progress as we drive our efficiency ratio lower as we execute on this 10-8-4 strategy. Scott?

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

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Thanks, Lyne. Steve and Lyne did a nice job of summarizing a lot of the results, so I'll keep most of my comments on the bank and the Bank's balance sheet. Then I can take questions later after we all finish.

So obviously, I'm very pleased with the fourth-quarter and our full-year results. We had very strong deposit and loan growth in Q4, and we are very well positioned to have continued success in 2017.

For the quarter, we had point-to-point loan growth of $107 million and $93 million in deposit growth. It was well matched. For the year, we grew loans $235 million and deposits $288 million, which was a big goal going in as Steve said earlier.

So our emphasis on deposits continues to pay dividends, and I so will take a few minutes to just talk about some of the elements of the balance sheet growth. For several quarters, I've been mentioning that we're highly focused on growing our deposit base.

As our efforts are really paying off, it's very important for us to add new relationships which I think is really important. So I've spent a fair amount of time reviewing the list of new depositors, really gratified by the size and quality and number of new clients. Both states added many new quality deposit clients throughout the year, and particularly in the fourth quarter, so that should really help us next year.

Non-interest-bearing deposits, as both Steve and Lyne said, are at 42% of our deposit base. But what's important to note is that both M&A, primarily from the operating deposits from our C&I, healthcare and non-profit banking initiatives. Core deposit growth is an essential element of our success and our ability to continue to fund ourselves internally, and is also a very big element of our bankers incentive compensation program.

Moving on to loan growth. As you can see in the results, very strong quarter. This was especially true within our Arizona bank.

The one thing I want to point out to everybody on the phone is we had great production out of Colorado as well. We just tend to have -- we just had an odd quarter in the sense that a number of our commercial clients actually sold. We have a nice structured finance business, and then of course we're primarily a C&I bank.

And it's just an interesting phenomenon. We had a lot of companies sell during the quarter, and so we didn't get -- there wasn't a lot of pay offs in the real estate portfolio but we had a number of clients that paid off on the commercial side.

But new credit extended for the quarter was an all-time record for us of $273 million, while credit advance on existing lines continued to be lower than we would like. I think it's an industry phenomenon. Fortunately, our production more than compensated for that.

Pay downs and maturities were slightly higher than prior quarters. During the quarter, we saw good growth out of Arizona much of which was driven by our public finance and real estate lending activities. Again, that market is not quite as mature as the Colorado market, so we're really happy with the teams we have down there so they are really starting to kick in.

You'll recall years ago, Colorado had all the growth and now it's nice to have great growth out of both markets. For the last several quarters, AZ has been higher than Colorado but I expect that to start to balance out next year. Again, the production is pretty even across both states, a strengthening market in Phoenix has really helped.

We expect loan growth to be more balanced. As I said earlier, next year, we have a very heavy emphasis on relationships sales management in both states.

We are especially focused on C&I lending. Pipelines for all segments of the business are healthy and growing for Q4, and we expect good loan growth for the coming quarters.

One of the hallmarks at CoBiz is we've been pretty good at finding niches to grow, and we continue to look for those to exploit. We're also actively seeking term, commercial and owner occupied real estate opportunities. You saw some of that growth already.

We have good economic strength, as Steve said, in both markets. And the important thing is we have a lot of capacity to grow our term real estate, and we're focusing on that. And again, you saw some of that in the numbers.

Our goal is as always on an annual growth basis of 8% to 12%. I think Steve mentioned that as well.

So we are very well positioned in both markets. Our relationship and service model is well-received versus the money center banks especially within the small to midsize business banking segment.

We also compete very well against the smaller community banks given the quality of our loan staff and our robust treasury, FX, swap and product offerings. As I said previously, we have plenty of [power] to do more term real estate lending. Many of our local competitors tend to be overly concentrated in that product type, and that is providing opportunities for our real estate lending staff in both states.

Not much to talk about on asset quality, but I'll touch on it a little bit. Asset quality remains very strong, and we aren't seeing any systemic trends that give us concern. And from my chair, that's the most important thing that there's nothing systemic going on that could cause us problems down the road. I'm not seeing any of that.

Non-performing assets decreased considerably during year, and are very manageable and compare very well to our peers at 23 basis points of total assets and improved slightly from last quarter. I think our peer average is closer to 90 basis points. We feel very good about that.

Classified loan levels remained consistent with prior quarters. We remain very comfortable with our loan-loss reserve levels given our healthy asset quality. Again, both of our markets are pretty stable and healthy.

As I said on every quarterly call last year, we expect our levels of classified loans to move up and down as they always do. But again, I'm not seeing anything in the economy or in our portfolio that would concern us. So I felt pretty good about asset quality.

Just a couple additional comments to Lyne's on fee income. She addressed a lot of that in her comments.

But I feel very good about our sales effort within our wealth management and our insurance businesses. Pipelines are good and we are having very good success at attracting new clients to both businesses. Again, our goal is about 8% annual revenue growth in both businesses.

Within the Bank, we've instituted some of price increases in the latter half of 2016 which should pay off in 2017. And then we're doing -- a lot more focused on collecting loan fees, and we've built some practices within our Bank to make sure we're collecting those fees.

So I'm feeling pretty good about that as well, back to the 10-8-4 discussion. So, optimistic about 2017 and I'll turn it back over to Steve.

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [6]

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Okay. With that, I'm just going to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Brady [Galley].

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Brady Galley, - Analyst [2]

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So maybe to start with the reserve, we've seen that continually come down each quarter through the course of the year. You're now down to 113 basis points, which is probably still a little above peer levels but not by a ton. How do you think about how the reserve will trend in 2017?

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Lyne Andrich, CoBiz Financial Inc - CFO [3]

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Well that's a difficult question at times to project. A lot of it's going to be a function of obviously classified asset levels which is the biggest driver of what provision needs is for us, and it's been relatively stable.

That said though, it's pretty at some low levels. So at some point, I wouldn't be surprised if we saw some changes in that quality levels.

And then it's also a function of our recoveries, and that's been where it's been probably the most difficult to project and anticipate. Every quarter, and this quarter was no different, we still continue to see recoveries come in from charge-offs through the last cycle. So that's the hard thing to predict.

Now the loan growth we still think, all else being equal, those two things being static, loan growth in itself should generate a provision need next year. But I don't really have a sense for what recoveries may be going forward.

I don't know if there's a real natural floor. I know we are a little bit higher than the peer group, but at some point I'm not sure where the regulators get uncomfortable. So that's the hard thing to constantly try to balance and manage to, but there is some room that it could drift a little bit lower. I don't know if it would go a lot lower though.

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [4]

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Yes, I think none of us here really believe that we're probably in a net release next year in that with growth. I would imagine that there should be some provision expense, but as Lyne said, recoveries especially are awfully hard for us to forecast. I kind of assume asset-quality numbers are going to be similar to this year.

But recoveries, we have recoveries coming back from longer than that. Loans that we made 10 years ago now in that. And you just never quite know.

And I've mentioned it before, we really didn't [release] an awful lot of creditors when we had issues in that, in fact we continued to work out. Even though we might've written off the loan, we continue to collect money from those loans years later. How much we're going to get in 2017, 2018, it's hard to say but I assume that there still will be recoveries.

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

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Yes. The way I feel now, I agree completely with Steve and Lyne, I think growth is going to be the biggest factor there. Loan growth.

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Brady Galley, - Analyst [6]

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All right, that's helpful. And then as you talked about the mark-to-market fees or gains that came from derivatives, $737,000. Is that something if rates continue to go up, is that something that we should think about being in fee income over the next couple years?

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [7]

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You could see some, but not really and probably not to that extent. It is due to a rising rate environment, it's also due to a steeping of the yield curves. So it's a combination of both.

It's hard to explain, it's the marks on this. But overall, if rates increasing the marks probably should be positive rather than rates decreasing which we did see a little bit in the prior year where we had a couple times where we had negative marks. But those were primarily the result of what I call a flattening of the yield curve back in 2015 for those of you that can remember 2015.

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Brady Galley, - Analyst [8]

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Okay. And then, Lyne, you talked about the SBIC meds fees being in line with the average. It was $2.5 million for the year, it's going to come down next year. What was the number just in 4Q?

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Lyne Andrich, CoBiz Financial Inc - CFO [9]

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Just in the fourth quarter it was around $300,000, $400,000.

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Brady Galley, - Analyst [10]

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Okay. All right, great. Thanks, guys.

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Operator [11]

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John Moran.

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John Moran, Macquarie Research Equities - Analyst [12]

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Lyne, just a quick question on the OpEx run rate, the double occupancy. How much of that drops out and did that fall out? Because I can't remember if that was supposed to fall out in the tail end of this quarter or last quarter -- 4Q or if it was actually January.

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Lyne Andrich, CoBiz Financial Inc - CFO [13]

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Yes, that's a good question. And yes, we did pay double rent in the fourth quarter and it impacted us by $450,000 or so. The difference is though -- and it did end at the end of this year, December 2016.

I wouldn't expect though occupancy costs to drop off next year. Because what's happening then is now that have taken possessions of building, we have a fair amount of lease hold improvements and other depreciation related to that. Some of our facilities that are going to offset our decrease in rent.

So all else being equal, I wouldn't see and expect a decline in total occupancy expenses. We've talked in the release -- and one of the strategies that we've had in terms of rationalizing our branch network, part of that was knowing that we had inflation in some of our downtown rent.

So in aggregate, I still think you should consider and view looking at our expenses at 4% or less for 2017. We're going to try to -- I know occupancy costs will be less than that, but there's other areas that were really focused on and mostly on salaries and compensation.

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John Moran, Macquarie Research Equities - Analyst [14]

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Okay, got it. That is helpful. And then just maybe circle back on the provision question.

I think in the past, you guys had talked about 25 basis points of new production and then we can come up with whatever -- obviously the recovery tailwind at some point runs out and charge-offs start to if not normalize at least tick up because you don't have that offset from the recoveries. But is 25 basis points of new production still a good way to think about provision?

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Lyne Andrich, CoBiz Financial Inc - CFO [15]

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That's how we model it longer term. I can't say that it will happen next year. It's a function of really asset quality levels, but historically 20 to 25 basis points is what we've modeled in a normalized credit environment.

I just don't know if we're quite to normal yet, and that conditions continue to be really good. It's actually a challenge for us to substantiate support, a greater need for allowance today just given the environment that were operating in.

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Scott Page, CoBiz Financial Inc - CEO of Colorado Business Bank/Arizona Business Bank [16]

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Also a function of the mix. The mix is a credit we put on can affect that number too, I think Lyne's comments are spot on though.

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John Moran, Macquarie Research Equities - Analyst [17]

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Okay. And the last one for me is just in terms of margin outlook, if you could remind us puts and takes there and what benefit you guys expect on each 25 basis point move?

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [18]

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If you want to put in dollars off the current portfolio, it's about $2 million for every 25 basis points annualized. So depending upon when you think that will happen. And then in the second year, it's even more powerful than that as all the assets have repriced.

But as you look in 2017, you want to forecast what are those rate increases would be, it's about $2 million annualized. And as I said, a year later it's maybe -- those same assets are $3 million.

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John Moran, Macquarie Research Equities - Analyst [19]

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Okay. And then on the funding side of things, you guys have done a really good job of growing deposits in line with loans, and there's been some remix there toward more favorable categories. Do you feel confident that you'd have some lag there, or do you see any competitive pressure on the funding side?

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [20]

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We're very fortunate that we really do not have a retail franchise. I think retail deposits probably are going to have to adjust relatively quick as retail lends off to that interest. But these are primarily all commercial deposits, with the exception of some of our money market accounts sit in our private Bank, maybe a couple hundred million dollars.

And those will have to be adjusted up a little bit more frequently. But when it comes to -- yes, could some of our interest or non-interest-bearing deposits come out and get repriced into a different category, possibly some of it will. Even the interest-bearing demand deposits, you'll see those move up at a very small fraction of the overall rate increases.

This is a commercial deposit portfolio. It's not chasing rates. We can't embarrass our customers by staying dramatically behind rates, but it -- our portfolio should adjust up about as slow as anybody's.

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

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This is where our business model is really favorable.

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John Moran, Macquarie Research Equities - Analyst [22]

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Yes, okay. Thanks for taking the questions. I'll step back.

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Operator [23]

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Tim O'Brien.

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Alex Morris, Sandler O'Neill - Analyst [24]

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It's actually Alex Morris on for Tim.

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [25]

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Okay, Alex.

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Alex Morris, Sandler O'Neill - Analyst [26]

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First question, with the rise in rates that we did see in the longer-term rates towards the end of the quarter, was there much pricing improvement that passed through on the small loans you were booking at the end of the quarter? And could you just -- if you have the number where loan yields were put on this quarter relative to the prevailing portfolio rate?

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [27]

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Scott, I think we want to be careful about how much numbers we show you month to month, but I think Lyne and I have talked about it. December was our highest margin of the -- .

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Lyne Andrich, CoBiz Financial Inc - CFO [28]

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So the average is [3.75%], and yes at December the run rate was higher in the month of December.

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [29]

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So we're hoping that will carry through into the first quarter, and there's no reason to think it wouldn't.

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Alex Morris, Sandler O'Neill - Analyst [30]

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Understood, thank you. Then just on expenses, you guys highlighted the rise in the self-funded insurance as well as the higher incentive comp. Backing out those, would the quarterly [selling] and benefit been in line with or close to the third quarter? Just trying to get a feel for that.

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Lyne Andrich, CoBiz Financial Inc - CFO [31]

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Well the fourth quarter was really a function of bonus adjustments and variable compensation, and the third quarter was a little light relative to normal run rates. Because if you look back, our loan production was pretty soft in the third quarter. And a lot of our goals are based off the balance sheet volumes, although there's other -- we also look at profitability in that too.

Year over year I think it's more important to look at. And in looking at the run rate, I do think medical -- it appears that our medical claims have -- we had a few large hits earlier in the year, and that's come back in line. So I don't see anything concerning on a run-rate basis.

The tick up we saw in the fourth quarter, we could isolate just to typical claims coming in higher in the fourth quarter because of everyone is trying to maximize their deductibles, et cetera. So I actually feel pretty comfortable that going forward next year that we will certainly manage our total salaries and comps under 4% if our medical plan continues to trend like it has in the last couple quarters.

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Alex Morris, Sandler O'Neill - Analyst [32]

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Understood, that's helpful. Thank you. And then just lastly, Scott, I was wondering if there was any color, or if it's too early understood, but any color you can provide on the new lending niches where you guys are looking? If there's anything you can share there?

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Scott Page, CoBiz Financial Inc - CEO of Colorado Business Bank/Arizona Business Bank [33]

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For example, we are really focusing on our healthcare niche in Arizona. That's always been highly successful, Alex, in Colorado and somewhat successful in Arizona. But a year ago we realigned the Bank or I realigned the Bank a little bit to have more of a vertical focus. So the gentleman that runs healthcare for us in Colorado also runs healthcare for us in Arizona.

I would suspect that Phoenix market is one of the biggest healthcare markets in the United States. So we're very bullish on that. We've had some nice success there already.

We're looking at some things on the native lands which think it's something we can really focus on. And then some fun areas like Craft Brewing, we've done a really nice job in that area in Colorado. Some opportunities down in Arizona, and obviously more in Colorado.

And then another niche which is Boulder centric would be the organic food business. And these aren't big enough to really be -- they are sub niches, but what we are getting really good at is finding growth areas and then building some business plans around those and attacking them. But the healthcare niche is by far the biggest of the ones I mentioned, that's one that's really important to us.

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [34]

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I think another area that could help -- you could see some expansion in 2017 and it's not really a niche but our real estate vertical which reports up to Patty Gage that runs real estate for us in both markets. But today I think it's 7% of our overall portfolio with construction loans and that, and the last time I looked, we don't even really -- I haven't looked at the 1 and 300 ratios for a while but we were at 50 and 200 last time I looked.

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Lyne Andrich, CoBiz Financial Inc - CFO [35]

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We're at 208 and 47.

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [36]

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So we have a lot of room there, and I feel really good about that, Alex. Because a lot of the community banks have loaded up on real estate and fixed rate real estate, and back when the tenure was 75 basis points more where it's at today. We really haven't gone out on the curve. We haven't been aggressive in that area.

We do think that there will be some opportunities during the year to be a little bit more aggressive, especially if rates start to increase. We would like to take out some of the -- reduce our interest-rate sensitivity over time. And I say over time, over a 2 or 3 year period of time.

If rates in fact do increase, I think every time they increase we will be looking at reducing our interest-rate sensitivity, locking in longer-term rates. But we feel real fortunate to be as sensitive as we are today.

One of the other items that we're looking at is, you've seen the investment portfolio shrink now for the last 3 or 4 years. Really we're targeting about $600 million investment portfolio by year end, where I believe we ended the year about $500 million. Once again, that will depend upon interest rates.

As rates increase, we will look at adding to that investment portfolio. If rates continue to increase, I think you should see that portfolio around $600 million by the end of the year. So we think there's a lot of opportunities out there.

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Alex Morris, Sandler O'Neill - Analyst [37]

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That's all really helpful. Thanks, everyone.

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Operator [38]

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Brian Zabora.

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Brian Zabora, Hovde Group, LLC - Analyst [39]

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A question on line utilization. You mentioned that you had some payoffs in the commercial side. Did that drive that lower line utilization as those businesses were sold, or were those continuing customers that just paid down lines?

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Scott Page, CoBiz Financial Inc - CEO of Colorado Business Bank/Arizona Business Bank [40]

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The latter. That didn't drive the utilization. As I was studying the numbers with Lyne, it struck me that some of our long-term clients finally sold their businesses and they paid off -- .

It's all good news. That's what they ultimately wanted to do, but we sure wish that the line utilization would go up. That would sure make my job a lot easier. That's the early explanation, Brian.

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Brian Zabora, Hovde Group, LLC - Analyst [41]

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Sure. Just your thoughts on -- in the past you've been very successful in hiring of experienced loan officers. Is that less of a focus now with the focus on expenses, or are you still looking to add staff?

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Scott Page, CoBiz Financial Inc - CEO of Colorado Business Bank/Arizona Business Bank [42]

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We're still looking to add. We're really focused on that, Brian. We're careful though.

We want to make sure when we hire people that they're people that can be accretive right away, and it's not as easy as you might think. We just hired a really good banker down in Arizona just within the last 30 days. He came to us from UMB, and we're very excited about him.

But both the market leader in Arizona and the head of our C&I group here are actively looking for talent. Matter of fact, we've been interviewing quite a bit here in Denver, and then the head of our healthcare group is looking for a high-end producer within Arizona as well.

We're really in good shape on the real estate side of things, but it's still a big part of our business plan. We know that drives revenue and drives results.

But to Lyne's point, we are managing our headcount. So we are less tolerant of non performers than we used to be, and I think you can actually add the talent and still keep your headcount in line to do it right.

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Brian Zabora, Hovde Group, LLC - Analyst [43]

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Okay. Great, well thanks for taking my questions.

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Operator [44]

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John Rodis.

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John Rodis, FIG Partners, LLC - Analyst [45]

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You mentioned that you hired a new lender from UMB down in Arizona. I was just curious, can you say how big of a book of business he had?

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Scott Page, CoBiz Financial Inc - CEO of Colorado Business Bank/Arizona Business Bank [46]

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I think it was -- and honestly if you combine loans and deposits it was over $100 million.

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John Rodis, FIG Partners, LLC - Analyst [47]

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Okay. So -- .

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Scott Page, CoBiz Financial Inc - CEO of Colorado Business Bank/Arizona Business Bank [48]

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It's hard -- it takes a long time to move business.

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [49]

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Especially if the C&I book doesn't move right away.

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John Rodis, FIG Partners, LLC - Analyst [50]

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Understood. I was just seeing the magnitude. Lyne, just a follow-up question for you. You said swap fees for the quarter were about was it $689,000, did you say what they were for the year?

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Lyne Andrich, CoBiz Financial Inc - CFO [51]

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For the year they were $1.25 million, and I'm rounding up a little bit. So obviously, very heavily weighted in the fourth quarter.

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Scott Page, CoBiz Financial Inc - CEO of Colorado Business Bank/Arizona Business Bank [52]

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A lot of emphasis on that right now.

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [53]

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A lot of activity with rates heading up.

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John Rodis, FIG Partners, LLC - Analyst [54]

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And the swap fees this quarter, the $690,000, how many contracts or how many clients was it that -- just a handful or -- ?

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [55]

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Oh no. That must be -- I'm going to guess, 8 to 10 maybe 12.

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Scott Page, CoBiz Financial Inc - CEO of Colorado Business Bank/Arizona Business Bank [56]

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Yes. We're getting good diversity of bankers and deals throughout the year.

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John Rodis, FIG Partners, LLC - Analyst [57]

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Okay. And then, Lyne, just one follow up on the tax rate. I think last quarter you said the effective rate of 26% to 27%. You came in at the lower end of that this quarter, is that still a good range going forward?

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Lyne Andrich, CoBiz Financial Inc - CFO [58]

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I think it is. There was really nothing unusual in this quarter on the tax line, it's really a function of how the magnitude of our tax-exempt book of business is. So going forward, I think that's a good rate to model.

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [59]

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Yes, right now, John, there really is no activity going on at CoBiz in the tax-exempt market. That market is really mispriced at this point time. It's hard to price it not knowing where your tax rates are, and some of the bids that we've seen from competitor banks they're still assuming the tax rates will be the same in 2017, 2018 and 2019 as they were in 2016.

So we've pulled out of that market. So Lyne is probably right, that's a good number to use since I don't see that portfolio increasing certainly in the short term unless things adjust themselves.

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John Rodis, FIG Partners, LLC - Analyst [60]

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Steve, just a follow up on that. Have you guys as far as if we do see a lower federal rate, how would that impact CoBiz specifically?

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [61]

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Well we've looked at that and Lyne's group looked at that, we looked at that quite a while ago. Because, John, there is -- .

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Lyne Andrich, CoBiz Financial Inc - CFO [62]

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There will be an immediate P&L impact as most people are aware. And the way we've modeled it based off of our deferred items, it's probably a $6 million hit to capital on when rates change. So that is $0.14 per share approximately or it's about 2% of our capital (multiple speakers).

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [63]

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And I think and Lyne's is using 25 basis -- 25%.

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Lyne Andrich, CoBiz Financial Inc - CFO [64]

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Yes, I'm going to 25%.

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [65]

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We had use a number, and so we've modeled it at 25%, John. I don't know if you think it's lower or higher or what. But we used 25%, and as you know the banking industry we all have this issue or it might be a little bit higher. But we earn it back relatively quick.

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Lyne Andrich, CoBiz Financial Inc - CFO [66]

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I would say a year and a half to two years to earn it back. At 2% we're not overly concerned, it's obviously a hit but -- .

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [67]

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It's a paper entry, and then you earn back real cash. I more than okay with that.

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John Rodis, FIG Partners, LLC - Analyst [68]

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Nope. Makes sense. As far as is 25% the right number, obviously who knows. But I guess we will all stay tuned and see what happens, right?

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [69]

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Right.

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John Rodis, FIG Partners, LLC - Analyst [70]

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Okay, thanks, guys.

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Operator [71]

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There are no further questions at this time.

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Steve Bangert, CoBiz Financial Inc - Chairman & CEO [72]

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Okay, well thank you everybody. We appreciate you participating. I think you see that we're pretty optimistic.

I feel like the wind is that our back for the first time in 10 years as we head into 2017, and I think we're going to have outstanding financial results. So any questions, feel please give Scott, Lyne or me a phone call. Thank you.

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Operator [73]

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That concludes today's conference call. You may now disconnect.