CVB Financial Corp (CVBF) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 CVB Financial Corp and its subsidiary Citizens Business Bank Earnings Conference Call.

My name is Mike and I am your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer period. Please also note, today's event is being recorded.

I would now like to turn the conference over to your host for today's call, Christina Carrabino. Ms. Carrabino, you may proceed, ma'am.

Thank you, Mike, and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2014.

Joining me this morning are Chris Myers, President and Chief Executive Officer and Rich Thomas, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Our Investors tab.

Before we get started, let me remind you that today's conference call will include some forward-looking statements. These forward-looking statements relate to, among other things, current plans, expectations, events and industry trends that may affect the Company's future operating results and financial position. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations.

The speakers on this call claim the protection of the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the Company's annual report on Form 10-K for the year ended December 31, 2013, and in particular, the information set forth in Item 1A, risk factors therein.

Now, I will turn the call over to Chris Myers.

Thank you, Christina. Good morning, everyone and thank you for joining us again this quarter.

Yesterday, we reported earnings of $25.5 million for the second quarter of 2014, compared with $28.7 million for the first quarter of 2014 and $24.5 million for the second quarter of 2013. On May 15, we announced the completion of our acquisition of American Security Bank (ASB). Our financials for the second quarter included 45 days of ASB's operations. This resulted in Citizens Business Bank acquiring $247 million of loans, $44 million of investment securities, $193.6 million of non-interest bearing deposits and $378.2 million of total deposits.

Our second quarter earnings were positively impacted by a $7.6 million recapture of the loan loss provision, partially offset by $638,000 of merger-related expenses. Earnings per share were $0.24 for the second quarter, compared with $0.27 for the first quarter and $0.23 for the year ago quarter.

Through the first six months of 2014, we earned $54.1 million, compared with $46.1 million for the six months of 2013.

Earnings per share were $0.51 for the six month period ending June 30, 2014, compared with $0.44 for the same period in 2013.

The second quarter represented our 149th consecutive quarter of profitability and 99th consecutive quarter of paying a cash dividend to our shareholders. Excluding the impact of the yield adjustment on covered loans, our tax-exempt net interest margin was 3.46% for the second quarter, compared with 3.60% for the first quarter and 3.46% for the year ago quarter. At June 30, 2014, we had $3.6 billion in total loans, net of deferred fees and discount on covered loans compared with $3.4 billion in total loans at March 31, 2014. Overall non-covered loans increased by $224.7 million and included about $240 million of loans resulting from the acquisition of ASB. Covered loans decreased by $6.6 million quarter-over-quarter.

Our loan pipeline continued to build momentum throughout the quarter and July should be a strong month in terms of new loan bookings. Our dairy & livestock loan portfolio decreased by $37 million for the second quarter. The combination of higher milk prices and lower feed costs produced strong profitability for our dairy customers. This profitability led to significant paydowns on many of our customers' herd and feed lines with the bank.

In terms of loan quality, non-performing assets defined as non-covered, non-accrual loans plus OREO were $50.5 million for the second quarter of 2014, compared with $46.7 million for the prior quarter. The increase was due to non-performing loans obtained in the ASB acquisition, which totaled $5.5 million at quarter end.

The allowance for loan and lease losses was $61 million or 1.75% of total non-covered loans at June 30, 2014 compared with $68.7 million or 2.11% of non-covered loans at March 31, 2014. Net charge-offs for the second quarter were $151,000, compared with net recoveries of $990,000 for the first quarter of 2014.

At June 30, 2014, we had loans delinquent 30 to 89 days of $2.3 million or 0.07% of total non-covered loans. Classified loans for the second quarter were $156.8 million, compared with $219 million for the prior quarter. The majority of the decrease is due to the upgrading of previously classified dairy & livestock related credits. We will have more detailed information on classified loans available in our second quarter Form 10-Q.

Moving on to covered loans. Covered loans represent loans in which we have loss-sharing protection from the FDIC as a result of our acquisition of San Joaquin Bank in October 2009. At June 30, 2014, we had a $148.2 million in total covered loans with a carrying value of $138.7 million, compared with $156.5 million with a carrying value of $145.3 million at March 31, 2014. At the end of the second quarter, our remaining purchase discount was $9.5 million. As a reminder, our loss sharing agreement with the FDIC expires this year in October.

Now, I'd like to discuss deposits. For the second quarter of 2014, our non-interest bearing deposits increased to $2.96 billion compared with $2.69 billion for the prior quarter and $2.52 billion for the same quarter a year ago. This represents a $443.3 million or 17.6% increase year-over-year, more than half of which was organic. Non-interest bearing deposits now represent 52.62% of our total deposits. Our total cost of deposits and customer repurchase agreements for the second quarter was 11 basis points compared with 12 basis points for the prior quarter. At June 30, 2014, our total deposits and customer repurchase agreements were $6.24 billion, compared with $5.32 billion for the same period a year ago and $5.74 billion at March 31, 2014. Our ongoing objective is to maintain a low cost stable source of funding for our loans and securities.

Interest income. Interest income for the second quarter totaled $61.2 million, compared with $61.1 million for the first quarter of 2014. The $61.2 million for the second quarter included $1.5 million of discount accretion from principal reductions and pay-offs as well as the improved credit loss experienced on covered loans. This compares to $1.7 million of discount accretion for the prior quarter. Total investment income of $16.9 million increased $1.3 million or 8.45% from $15.6 million for the first quarter of 2014.

Non-interest income was $7.1 million for the second quarter of 2014, compared with $11.5 million for the first quarter. The first quarter included a pre-tax gain of $5.3 million on the sale of one loan, which was classified as held for sale.

Now expenses. We continue to closely monitor and manage our expenses. Non-interest expense for the second quarter was $31.3 million, compared with $31.2 million for the first quarter. Non-interest expense represented 1.79% of average assets for the second quarter compared with 1.87% for the first quarter. The small quarter-over-quarter increase in expenses was due to a $638,000 increase in non-recurring expenses related to our acquisition of American Security Bank. On a year-to-date basis through June 30, 2014, total non-recurring acquisition expenses were $1.1 million.

Now, I'd like to turn the call over to Rich Thomas, our CFO to discuss our effective tax rate, investment portfolio and overall capital position. Rich?

Thanks, Chris. Good morning, everyone.

Our effective tax rate was 36.5% for the six months ended June 30, 2014 compared with 36% for the first quarter. Our effective tax rate varies depending upon tax-advantaged income as well as available tax credits.

Now to our investment portfolio. During the second quarter of 2014, we sold an average of $213 million in overnight funds to the Federal Reserve and received a yield of approximately 24 basis points on collected balances. We also maintained $75.1 million in short-term CDs with other financial institutions, yielding approximately 71 basis points.

At June 30, 2014, investment securities totaled $3.02 billion, up $267.3 million from the first quarter of 2014. Investment securities represented approximately 40.67% of our total assets at quarter end. During the second quarter, we acquired $44 million in investment securities from American Security Bank. At June 30, 2014, we had an unrealized gain of $41.5 million in our total investment portfolio compared to an unrealized gain of $8.7 million for the prior quarter. Virtually, all our mortgage-backed securities are issued by Freddie Mac or Fannie Mae, which have the implied guarantee of the US government.

We have been strategically reinvesting our cash flow runoff from our investment portfolio, carefully weighing current rates and overall interest rate risk. During the second quarter, we purchased $276.4 million in mortgage-backed securities with an average yield of 2.14% at an average duration of approximately four years. We also purchased $19.7 million in municipal securities during the second quarter with an average tax equivalent yield of 3.85%.

Prepayment speeds in our investment portfolio have somewhat stabilized. And based upon current interest rates, we anticipate receiving approximately $30 million in monthly cash flow from our portfolio.

Now, turning to our capital position. Our capital ratios are well above regulatory standards and we believe they still remain above our peer group average. Our June 30, 2014 capital ratios will be released soon concurrently with our quarter-end Form 10-Q.

We continue to look at many different opportunities to deploy our capital and liquidity. As part of our stock repurchase program authorized by our Board of Directors in 2008, we repurchased [348,000] shares of common stock in the second quarter at an average price of $14.15 per share for a total of $4.9 million. We currently have 7.4 million shares remaining for repurchase under the program. For the six months ended June 30, 2014, shareholders' equity increased $68.9 million to $840.8 million.

I will now turn the call back to Chris for some closing remarks.

Thanks, Rich. Now, let's talk about economic conditions.

In terms of the dairy industry, feed costs decreased in the second quarter of 2014 as feed supplies were abundant. The forecast is for record harvest this fall. While milk prices appear to have moderated somewhat from the highs of the first quarter, they are still at elevated levels and should continue to provide profits for the dairy industry. According to the California Department of Food and Agriculture, the CDFA, feed costs in California represented 65.2% of total milk production costs at the end of the second quarter of 2014, up from 64.8% of total milk production costs for the first quarter, but down from 66.9% for the fourth quarter of 2013.

According to data from the US Department of Agriculture, dairy farmers were paid approximately $24.47 for 100 pounds of Class I milk in May, up from $23.65 in April and significantly up from $17.76 in May 2013. As we reported last quarter, US dairy exports are at historic highs, particularly to China, the world's top dairy importer. Milk prices are expected to remain elevated throughout the remainder of 2014.

Turning to the overall California economy. According to various economic reports, California's Employment Development Division reported the unemployment rate was 7.6% in May 2014 compared with 7.8% in April and 9% back in May 2013. The unemployment rate is estimated to drop to 6.8% in 2015, and to 5.9% in 2016. California has gained a total of 1.3 million jobs since the recovery began in February 2010. The leisure and hospitality sector led California's job gains in May and it continues to be one of the fastest growing sectors in the state over the past year. The number of homes sold appears to be slowing down to a more normal level compared with last year. Economists cite an end to foreclosures and other distressed properties that were flooding the market. Home prices are still high and inventory is expected to remain tight, notwithstanding the California housing market should continue to be an economic bright spot throughout this year and into 2015.

Another emerging bright spot in California is the Inland Empire economy where our bank is headquartered. Economic growth in the Inland Empire is expected to be the highest of any major region in California, growing at an average rate of 4.2% through 2020. Growth in the Inland Empire region is expected to be ahead of other fast growing metros, including the Phoenix and Houston areas.

In closing, we are pleased to complete the acquisition of American Security Bank and are looking for other exciting opportunities in the Southern and Central California marketplace. We remain equally focused on achieving organic loan and deposit growth through our same-store sales and de novo initiatives. We believe a balanced growth plan of acquisition and organic growth is the right corporate strategy for CVBF.

That concludes today's presentation, and now, Rich and I would be happy to take any questions that you might have.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Aaron Deer, Sandler O'Neill & Partners.

Chris, you sound pretty optimistic on the growth outlook improving here with respect to the loan activity. Can you talk about kind of where the pipeline stands today versus a few months ago and what you're seeing in terms of the mix between commercial real estate, C&I, and the other categories?

Sure, it's been a little -- the earlier part of this year was a little frustrating. Our pipeline was slower than we'd like, we were working hard on it, we've required some new de novo teams and we opened up in San Diego, we hired a head of agribusiness in the Central Valley, we've made some other key hires along the bank and we were a little frustrated that we weren't achieving faster loan growth.

But our pipeline right now is the strongest it's been since 2013 and in the second half of the year. So, I feel really good about it. It's been a little bit of a build, most of it is generated in CRE, although we're putting on more and more C&I lines. They are just not using them as much. We've had some great wins here in the last 60 days on the C&I side, but they're just not tremendous borrowers. But good depositors, and you've seen our deposit growth is very strong and continues to build and we hope that will do the same in the future. So, I feel pretty good about it.

San Diego finally opened and it's a little different, having three or four people trying to work out of temporary space than being in an office that looks professional and is in the right location. So, I feel like those guys really haven't kicked in yet, but I think they've got -- their pipeline is building, so that's going to be a positive for us.

And also on the ASB side, we're getting in front of a lot of clients there and we think there are some good cross-sell potential for us to uplift some of their loan totals too. And then for the rest of the bank, it's just same-store sales and building our totals.

Sure. On the subject of line usage and not so much with, maybe folks that you've just established credit with, but on your book where does line usage stand today versus over the past few quarters?

I don't have any numbers for you on that, but I can tell you that the trend has been down over the last year, and especially with the paydowns in dairy the trend is even further down. And if you look at our unallocated loan loss reserve on the -- or the unfunded loan loss reserve, it's actually up a little bit just simply because the usage is down, particularly on the dairy side.

And if you look at the quarter-over-quarter growth from first quarter to second quarter, if you exclude the dairy loans, we actually had positive growth of about -- you take away the covered loans, and you take away the dairy loans, we grew about $22 million quarter-over-quarter. Not anything to write home about, but it's at least we have positive progress there and then if you -- even if you include the covered loans and then we still grew by $15 million quarter-over-quarter. And I think the dairy paydowns are going to subside here in the third quarter, I'm not sure about that, but it feels that way and we've actually brought in few good new dairy clients to the bank, which is very positive and that should help our totals too.

And then a question on the reserve releases. Obviously, you've had terrific credit quality and you've got a very big reserve and I know, it's tough to gauge where that goes, but if you just look at what the trailing loss rates have been and there haven't been much, and you've obviously got a very favorable outlook on the economy. Is it reasonable that we might expect to see another quarter or two of negative releases or hoping to just kind of let yourself grow into it at this point?

Yes, it's tough to project that because we go through quite a bit of -- there's a lot of factors that go into that loan loss reserve, and some of those are economic factors, some of those are historical loan losses and the trends of those loan losses, but you're right. As we continue to have quarter-over-quarter of either very small net charge-offs or actually a positive recovery, net, net recovery, if you will, those factors do go into our formula. So that will put more pressure on us to release reserves as we go forward. But we get loan growth and then that's going to be an offset to that release of reserve.

One of the things that I look at is a year ago June 30, 2013, our total classified loans at the bank were $304 million. Today, those total classified loans, if we include ASB, are about $157 million. So we're about half the level we were in classified loans that we were only a year ago. And so when you look at all these releases over the last four quarters, that's a big factor in those releases because those substandard credits, even though they were paying us are now either special mention graded or they are full pass graded credit to the bank. So that uplifting and a lot of that's dairy, no question about it, but a lot of that uplifting is the reason for the -- or big reason for the unwinding of the reserve.

Hugh Miller, Sidoti.

I guess, I had a question following up about kind of the lending and you gave some great color on kind of the outlook and the economy. As we take a look at, I guess at some of the [AHI data], there was a very strong inflection point for growth in the second quarter, which hadn't maybe trickled down to what you guys are seeing at this point, but can you talk about kind of the loan competition side of things and whether or not you guys are, maybe seeing a little less in the way of growth just because of credit terms and your thoughts there?

It remains a really competitive environment. I don't know that it's changed tremendously over the last 90 days. I do think it's a little bit more competitive than it was a year ago in terms of both underwriting and in terms of rate. The 10-year treasury being at under 2.5% right now, puts a little bit more pressure on some of that pricing. But our funding is so strong that for those quality deals we want to make sure we're competitive on the pricing side and we're going to compete on those and obviously we have to take into account interest rate sensitivity along the way, so that we don't get out of whack in terms of making interest rate bets, so to speak.

But we're going to compete for those B-plus, A-minus and A loans out there. We're just not in the business of competing on the -- for the lower-end loans and for instance we don't do subprime auto lending and we don't do some other types of lending. We really do very little or zero of mortgage warehouse lending. Those areas are we think are riskier areas and it's, we just don't chase yield there. We stay with the high quality stuff and we believe that's the right tactic for us, given our strong funding.

Okay. And so, are you seeing any change in sentiment amongst your business borrowers who are potentially looking to spend more from a capital investment standpoint, are there any particular subsets of the portfolio that you're seeing kind of demand that's strengthening or a change in sentiment regarding borrowing?

Not anything dramatic. I think loan demand is probably the same it was a year ago, maybe a little bit better in terms of the marketplace out there. A lot of the loan growth that you're seeing out there is on the larger deals. It's in participations, it's in that side of the business. Most of the deals we're playing in are seven-figure loans. And the seven-figure loan market, it's a little better than it was a year ago in terms of what's going on in the marketplace, but it's not significantly better. So it's very competitive out there, but I feel we are extremely well positioned to compete for that -- for the high quality stuff. And no one -- maybe I can't say no one, but very, very few competitors have lower cost of funds than we do and lower deposit pricing than we do. So we feel like we're never at a competitive disadvantage to go ahead and compete on the pricing side for that quality business.

Okay. It's very helpful, I appreciate it. And then the follow-up question I had was with regards to kind of the synergies for ASB and kind of how you're thinking about that, now that you've gotten a chance to kind of get your hands dirty a bit there. What are you seeing as opportunities on that side of the business?

I think, so far so good and we're real pleased with the people and the integration so far. We actually convert our data processing and operations systems in late August, so that's the next step to kind of in completing our final journey and we should be pretty much fully integrated by the end of the third quarter. Some of that will bleed a little bit over into the fourth quarter. So I think the real earnings pickup is going to be fully felt certainly in the first quarter of 2015, but materially felt in the fourth quarter of 2014, as we go forward.

The other part about ASB is we feel that from a location standpoint, we've got some good opportunities to consolidate some offices and we have come out and talked about that recently and you'll see that in an 8-K coming out here in the next day or so, because I'm doing a presentation next week at a conference in New York.

But basically at the end of the day, they had two what we call electronic branches, which are ATMs and -- they call them electronic banking vestibules and five branch locations. And between consolidating our branches with their branches and actually closing down these electronic banking vestibules out of those seven locations, we are only keeping two. So there are a lot of cost synergies here and we feel like that's not going to inhibit our ability to do business at all. A lot of those locations cross over pretty well. So we feel like, from an efficiency standpoint, we are well on track to create some of the cost savings that we desire to create.

Can you give us a sense from a quantitative standpoint on what that might -- or range on what that might be as you kind of consolidate those operations?

I think for 2015, ASB will and this is again -- this is a prediction, if you will, we will bring to the bottom line $0.05 a share due to ASB for 2015.

Julianna Balicka, KBW.

I have a couple of questions. One, a small housekeeping follow up. Last quarter, you had $0.5 million of higher healthcare costs. Did you have a reversal of those that you were expecting?

Yes we did. We had some of the reversal there and then additional healthcare costs kicked in. So it's kind of bouncing back and forth but it was several hundred thousand dollars of reversal in the second quarter. But then, as we go on, there is always something in that category that's bouncing around based on whatever is going on with our 800 associates in the bank. So there was a reversal of several hundred thousand dollars in there.

Okay, very good. And then in terms of margin, and I am sorry if you had this in your prepared remarks and I missed it, last quarter's core margin benefited from $2.3 million in interest income recoveries. So were there any such recoveries in the second quarter and how should we -- or prepayment fees and then how should we think about the pipeline for recoveries on the interest income side kind of going forward given [your good credit quality]?

So interest margin, there weren't any real notable recoveries in the second quarter, so that the net interest margin of 3.46%, has really been very consistent. Last quarter, if you take out that $2.3 million, we were about 3.45%, 3.46% as well last quarter.

Prepayment fees year-to-date are about just under $1.4 million. They were $790,000-ish in the second quarter. This is tracking about $700,000 less than last year. So at June 30, 2013, we're about $2.1 million in prepayment fees and this year, we're about $1.4 million year-to-date prepayment fees, so a little bit down. But that makes sense to us because the amount of prepayments that we're seeing in the bank and the amount of refinancings has slowed down quite a bit. Although in this interest rate environment, it does put pressure on us when the ten-year treasuries go below 2.5%, it puts more prepayment pressure on us, no question about it.

Okay, that makes sense. And then a bigger picture question and I'll step back, you discussed the milk, feed etcetera current prices, but could you talk a little bit about the California drought, whether it's having an impact on you directly or indirectly in your markets, maybe even beyond what you're seeing for CVBF specifically, but where we should start thinking about it for other banks, if at all?

It's something that we're kind of watching with eyes wide open, so to speak and we're going certainly in our dairy portfolio and in our agribusiness portfolio. For any mid six figure credit and up, we're looking pretty carefully about what we think the future impact is going to be on those different businesses because those are the ones that are going to be most dramatically impacted by, if this drought continues.

And so far, basically, businesses are fine in terms of on the dairy side, which is the vast majority of our dairy & livestock and agribusiness side. Some of our agribusiness clients are choosing not to replant crops or to plant crops that are a little bit more water resilient, don't require as much water. If you look at almonds for instance, there's been a lot of planting in almonds, but almonds use up a lot of water and so pistachios use up less water. That's about all I know about this business, but I do know a little bit.

So, I think we're okay for 2014 in terms of our client base, but if we have another year in 2000 -- another drought year. It will have some impact and so, we're watching it very closely, although I will say this, I think, our agribusiness portfolio is under $50 million in total agribusiness loans in the bank. So, it's not a huge business for us, but we are looking to build that going forward and we're watching the water issue very closely.

Very good, thank you very much.

(Operator Instructions) Gary Tenner, D.A. Davidson.

Good morning. I had a couple of questions just on the expense lines. The occupancy line didn't really move this quarter despite half a quarter of ASB. So, I wonder if there is any offsets in there or anything that we need to be aware of. And then professional services, first half of the year up a decent amount versus last year and just wondering if that reflects any additional legal expenses or anything in there that we should kind of model going forward.

A lot of the ASB costs are embedded in that professional services. So a lot of those are non-recurring and in total, we had about $1.1 million in non-recurring ASB acquisition related expenses. I can't tell you that all of those are in professional services, but a good chunk of those are in professional services.

On the occupancy side, we're making some really good progress there and we're getting more and more efficient. It's not showing in the numbers yet because some of this -- it's going to take a few quarters to really play through. For instance, I just said that we had two electronic banking locations and five branches and at the end of the day we'll be down to two. Well, that isn't accomplished yet. We've just announced that. So I think that those things will kick in over the next few quarters and so we do feel like we're going to be able to have some good cost saves in the occupancy side.

On the equipment side, we get in -- some of that gets into technology and so forth and we're spending more dollars on technology than we were -- I think year-over-year, we're going to be spending more money on technology. So it's kind of a little -- somewhat it's going to a trade-off of spending fewer dollars on brick and mortar and more dollars on IT-related equipment and software and all those things.

Doug Johnson, Evercore.

My first question is a follow-up on the margin, it was -- if you exclude the NPA recovery from 1Q, it was pretty stable this quarter. Is that sustainable? Should we expect stability in the margin, or is there kind of ongoing maybe modest pressure just given loan yields are coming down?

I'm hoping that the margin is sustainable, but a lot of that's going to be dependent on our ability to grow loans, as loans are higher yielding than purchasing securities for us. ASB had actually a higher loan yield than our average loans. So that will help us a little bit going forward, although we mark that -- we mark that from the get-go when we do an acquisition. So if we grow loans, I think our net interest margin will hold pretty firm and maybe even improve a little bit. If we don't grow loans, it will put more pressure on us.

Okay, great. Next topic, just kind of uses of capital. I know you started buying back stock a little bit this quarter. Is that sort of an opportunistic type thing or is it the type of thing where if you guys continue to build capital at the pace you're building it, we should expect sort of an ongoing buyback? I know obviously there is some price sensitivity but sort of there should be some buyback kind of built-in?

The capital, I guess, we do have strong levels of capital in the organization and we prioritize the use of that capital as follows. Certainly, we want to make sure that we're returning some of that capital to our shareholders in our ongoing dividend, and we have a $0.10 a share dividend, which really has been kind of tracking to 40% to 45% of our ongoing profitability. And so that's kind of a run rate and that could change. We meet -- every Board meeting, we talk about these types of issues. So that's something that's ongoing. I think there's going to be some return of capital through our normal dividend on a quarterly basis and we've paid 99 consecutive cash dividends. So, that seems to be pretty stable over time.

The next use of capital is to do what we did with American Security Bank and make an acquisition, and we were able to do an all-cash deal there and I think that had a $20 million impact on our tangible equity, I think, is that right Rich?

Yes.

About $20 million-ish, to the negative. So that was a use of capital there.

And then the third lever is looking at buying back our shares and we did a little bit of that in the second quarter opportunistically. We do have 7.4 million shares, I believe -- 7.4 million shares remaining to be purchased and we'll continue to be opportunistic along the way. As we build more and more capital, I think the possibility of buying back stock becomes greater, but the first use of that capital, our first desire is to use it for acquisitions.

Got it, great. And maybe just another possibility that's come up in the past is prepaying that final FHLB borrowing. I know there is a prepayment penalty there. But with rates a little bit lower at the long end of the curve, has your thought process changed at all on potentially doing that?

No. There is a big part of me, personally, that wants to get rid of this debt because I don't like paying 4.52% coupon on $200 million in debt. In fact that -- it's amazing because if you look at the rest of the funding for the bank, the other $6 billion in deposits, it's actually cost us less than that $200 million at 4.52% in terms of deposit cost vis-a-vis borrowing cost. So the problem with that is, is that last time we checked our prepayment penalty which I think was in the last 30 days, it was $17.9 million. And so when we back into the math, it becomes six of one, half a dozen of the other whether we prepay it or not.

The good news is that we are a mere 28 months away from having that go away and the question is, is do we take some of that down between now and the 28 months. It's a possibility, but it's something that we're just tracking month by month by month and that $17.9 million is a big number.

Got it. Great. Guys, thanks for taking my questions.

(Operator Instructions). It appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Myers for any closing remarks. Mr. Myers, the floor is yours, sir.

All right, thank you very much and thank all of you for joining us today on our call and we appreciate your interest and look forward to speaking with you again on our third quarter 2014 earnings conference call in October. In the meantime, feel free to contact me or Rich Thomas. Have a great day and a great summer. Thank you.

And we thank you, sir and to the rest of the management team for your time and you also have a great remainder of the summer. The conference call has now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you and take care, everyone.