PacWest Bancorp (PACW) 2013 Q1 法說會逐字稿

Good afternoon, and welcome to the CapitalSource Inc first quarter 2013 earnings conference call.

All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note, this event is being recorded.

And, I would now like to turn the conference over to Mr. Dennis Oakes, Senior Vice President Investor Relations and Corporate Communications.

Please, go ahead.

Thank you, Amy.

Good afternoon and welcome to the CapitalSource first quarter 2013 earnings call.

With me today are CapitalSource's CEO, Jim Pieczynski, CapitalSource Bank Chairman and CEO, Tad Lowrey, and Chief Financial Officer, John Bogler.

This call is being webcast live on the company website, and a recording will be available later today.

Our earnings press release and website provide details on accessing the archived call.

We've also posted a presentation on our website which provides additional detail on certain topics that will be covered during our prepared remarks, but we will not be making specific reference to the presentation.

Investors are urged to carefully read the forward-looking statements language in our earnings release and on the investor presentation, but essentially they say the following.

Statements made on this call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All forward-looking statements, including statements regarding future financial operating results, involve risks, uncertainties, and contingencies, many which are beyond the control of CapitalSource, and which may cause actual results to differ materially from anticipated results.

CapitalSource is under no obligation to update or alter our forward-looking statements whether as a result of new information, future events, or otherwise, and we expressly disclaim any obligation to do so.

And finally, more detailed information about risk factors can be found in our reports filed with the SEC.

Jim will begin our prepared remarks, and then we will take your questions.

Jim?

Thank you, Dennis, and good afternoon, everyone.

Our first quarter of 2013 represents a strong start to the new year, as our interest income, net interest margin, total loans and leases, and net income each increase from fourth quarter levels at CapitalSource Bank.

All of our credit metrics at the bank were also within acceptable parameters and our total cost of funds was down marginally.

For the parent, our loan portfolio declined by one-third, and we repurchased an additional 15 million shares bringing the total capital return to shareholders since December 2010 to well over $1 billion.

Over that same 10 quarters, we reduced the outstanding share count by 42% to 196 million shares.

As of March 31, we still have $89 million in repurchase authority remaining from the original $250 million authority granted by our Board last October.

The slowly recovering economy, abundant liquidity, historically low interest rates, and competitors loosening terms as they struggle to add assets make for a very challenging business environment.

We are successfully growing assets, however, despite those hurdles.

John will provide some insight into some of our underlying financial performance metrics in the quarter, and though some appear on the surface to be counter to industry trends, we are experiencing the same pressures.

We are, however, at an advantage because we are starting at a point that is higher relative to our bank peers for net interest margin, loan growth, return on assets, and other key performance metrics.

For example, the net interest margin at CapitalSource Bank increased by 24 basis points this quarter to 5.08%.

That was primarily due to the full quarter benefit of our fourth quarter loan growth, which largely occurred late in the prior quarter.

In addition, we've had some certain nonrecurring items which also added to our margin.

Those benefits together acted to offset what otherwise would have been a lower NIM due to declining loan yield.

Reflective of the pricing pressure we have seen over the last several quarters, the all in yield for new loans was down 27 basis points this quarter at 5.5%, which is about 90 basis points lower than the overall underwritten yield on the bank's existing portfolio when you exclude the benefit of accelerated amortization and discounts.

A new aspect of the intensely competitive environment for loans that we have more recently encountered is the repricing of our existing loans prior to maturity.

So far, this seems to be concentrated in our cash flow book, but we will be watching closely to see if it becomes more of a trend as it is another factor contributing to declining loan yields.

We do continue to reap the benefits of our diverse and national commercial lending franchise as a counterbalance to these business challenges.

A month into the second quarter our pipeline remained strong.

And, our resolve to make proper restructure loans to credit worthy borrowers is even stronger.

New loans funded in the quarter were spread among various business lines but concentrated in commercial real estate, healthcare and technology cash flow, multifamily, and lender finance.

Going forward, our outlook for 2013 remains positive.

We continue to anticipate double-digit loan growth at the bank, stable operating expenses, and a net interest margin and return on assets that are among the top for banks of our comparable asset size.

Our plans to obtain bank holding company this year status remain unchanged.

That is, we intend to file our application and remain hopeful that the FRB review process will conclude prior to year end.

Tad will now share his views on the quarter.

Tad?

Thank you, Jim.

Good afternoon, everyone.

We were very pleased with the first quarter's loan growth of the bank of 2.4%, which did not include a $67 million purchase of loans from the parent company.

In particular, we were pleased because the first quarter is typically seasonally weak.

And, despite the outsized fourth quarter, combined with the ongoing and intense competitive pressures that you'll hear all of us speaking about, we remain comfortable with our full-year projection of $2.2 billion of new loan production, which, subject to continuing high payoff levels, should lead to low double-digit loan growth.

Because except the bank's net interest margin to decline, the asset growth we expect this year is one key to sustained earnings growth.

We are off to a good start, therefore, as bank assets grew by 2.5% in the first quarter and surpassed $7.5 billion for the first time.

We project continued asset growth throughout 2013, but additionally expect to transition approximately $250 million in excess liquidity to support loan growth, which will further help to offset some of our NIM compression.

Moving to deposits.

We saw a drop of 2 basis points in our average cost last quarter.

The level of CD maturities scheduled through July is low, relative to our overall book of deposits.

That's a favorable condition to raise incremental deposits as it reduces the impact of existing CDs repricing, which are generally at higher rates for new offerings.

The net effect is that we expect the cost of funds to be roughly flat or up slightly through the end of this year, 2013.

Expense management is and will remain an ongoing focus at the bank.

Our noninterest expense was down meaningfully in the quarter, although about 50% of that decline was one time in nature.

John will provide more detail on consolidated operating expenses, but we remain confident in our ability to keep expenses flat or slightly lower than last year while funding anticipated asset growth this year and ultimately reaching our 2% of assets goal for annual operating expenses.

Credit metrics continue to be within expected ranges, although the dollar amount of our nonperforming assets has become so low it's now below 50 basis points at quarter end.

We could see some volatility from quarter-to-quarter.

Overall, however, the entire portfolio of loans that we have made since the inception of the bank has performed significantly better than our expected life of loan credit losses of 1.5%.

Although we recognize a significant portion of these loans have been made in the last two years.

Our effective tax rate at the bank was 41%, in line with our expectations and equal to our statutory, federal, and state income tax rate.

Capital levels remain strong and well above regulatory norms with a risk-based capital moving up to 16.7% and our tier one leverage ratio at 13.4%.

John is up next.

John?

Thank you, Tad.

We indicated on our fourth quarter call that the first quarter net interest margins would benefit from the full quarter impact of the prior period loan growth, which largely occurred near year end.

That change in asset mix in higher FAS 91 amortization contributed approximately 21 basis points to net interest margin expansion this quarter while a series of nonrecurring items added an additional 15 basis points.

The remaining quarter-to-quarter reconciling item partially offsetting that combined 36 basis point boost was a 12 basis point decline in the loan portfolio yield.

A reflection of continued pricing pressure.

We previously indicated our expectation that the bank net interest margin would remain above 4.75% throughout this year, but pricing pressure has exceeded our expectations, which could cause the margin to drip below that level.

Net principal payments of $402 million at the bank were higher in the quarter than the already high run rate of $381 million in the fourth quarter.

Assuming this level of portfolio turnover continues, we expect ongoing NIM pressure throughout the year due to declining market yields on new loan, repayments of loans with higher yields than those being added currently, the repricing of existing loans, and lower amortization benefits as loans purchased previously at discounts payoff.

The principal counterbalance to these negative trends is the excess liquidity at the bank, which we expect to be able to redeploy into higher yielding loans over the course of the year.

Our return on assets in the quarter benefited from all the one-time items I just mentioned and increased 5 basis points from the prior period to 1.89%.

We expect ROA to decline over the balance of the year, however, in tandem with the expected NIM decline, and the return of expenses to expected levels.

Tad spoke a bit about operating expenses at the bank and we experienced a similar overall decline from the fourth quarter on a consolidated basis.

The first quarter savings were a combination of lower third-party loan servicing expenses, lower professional fees, generally related to workouts, a lower rate of bonus accrual given our outperformance in the fourth quarter, and lower commission rates on loan production.

First quarter operating expenses of $42 million were $5 million lower than the fourth quarter, but included certain nonrecurring benefits.

We believe that some of the savings we captured in the first quarter will be permanent, however, so we are reducing our range of anticipated operating expenses for the full year by $5 million to a range of $180 million to $190 million compared to actual operating expense of $186 million in 2012.

Let me remind everyone that our definition of operating expense excludes leased equipment depreciation, REO and other foreclosed asset expense, provision for unfunded commitments, and loss on debt extinguishment.

These latter items, which we call non-operating expenses, are expected to total approximately $20 million this year, primarily due to continued growth to the lease portfolio.

Non-operating expenses of $2.7 million this quarter were lower than our expected run rate, however, due to minimal REO expense and the reversal of prior provisions for certain unfunded commitments, which partially offset leased equipment depreciation of $3.4 million.

Consolidated credit was a bit of a mixed story for the quarter with a significant decline in impaired loans due to sales and payoffs offset by a $30 million increase in non-accrual loans.

That increase relates primarily to two parent loans that were previously impaired and performing under troubled debt restructurings but where new credit weaknesses were identified in the quarter causing loans to be put on non-accrual status.

Additionally, the consolidated loan loss provision in the first quarter of $12.5 million was higher than expected and higher than we would anticipate in future quarters this year.

With the decline of $171 million in the first quarter, the parent portfolio continues to run off a more rapid pace than we projected just a few months ago.

Our current forecast projects a year end loan balance at the parent of a proximally $200 million, which would represent more than a 60% decline from the year end 2012 balance of $549 million.

Our consolidated tax rate of 42.4% in the quarter was slightly above our expected range of 40% to 41% as a result of tax true up adjustments totaling $1.3 million.

We again utilized the parent company net operating loss carry forwards to offset federal taxable income in the quarter such that our effective cash tax rate was just 4.5%.

The remaining net deferred tax asset at quarter end was $346 million, so we expect to be able to utilize NOLs to continue offsetting cash tax liability well into 2015.

After repurchasing 15 million of our shares in the first quarter at a total cost of $138 million, we had only $71 million of unrestricted cash at the parent on March 31.

As a result, we will be rebuilding parent liquidity via loan repayments, tax repayments from the bank, and possibly a bank dividend.

The bank made a $23 million payment to the parent in January representing its taxes due for the fourth quarter of 2012.

Three additional quarterly payments totaling approximately $45 million to $60 million should occur over the balance of this year.

We are also expecting the debt in the two remaining securitizations to payoff as early as the second quarter which will add approximately $185 million of loans to the parent unencumbered pool and become an additional source of liquidity as those loans pay off over the ensuing 18 or so months.

We look ahead to the balance of 2013, we have an extremely strong balance sheet at CapitalSource Bank and the parent company continues to liquidate.

As Jim and Tad both indicated, we feel positive about our ability to expand our loan portfolio with high quality credit taking full advantage of our diverse collection of specialty businesses which we operate nationally and at high performance levels.

Despite competitive pressures, we also are confident that we can maintain our credit first approach and continue to grow profitably.

Jim will now have brief closing remarks and then we will be ready for your questions.

Thanks, John.

I want to close by highlighting what we see as the three key takeaways from our first quarter results announced today.

First, we are on a path to achieving double-digit loan growth at CapitalSource Bank for the full year, and we believe we can achieve that level of growth responsibly from a credit perspective.

Secondly, competition and pricing pressure continue to be intense, and this has resulted in lower yields on new business which will cause our NIM to drift down from current levels.

With that being said, our yields and our NIM are still higher than most of our peers.

Finally, we are generally better positioned than peer banks of similar asset size to weather the competitive storm that we are collectively facing.

The advantages we have are a well-established national lending franchise with a diverse group of businesses that are generally more specialized in nature than what you see at most bank lenders.

In addition, we have a very talented group of individuals both originating loans and managing our loan portfolio, and they are all supported by our retail banking team which is raising the deposits necessary to support our growth at reasonable rates which are especially attractive when considered -- taking into consideration the low cost structure of our branch network.

We look forward to the balance of 2013 and beyond with optimism and confidence.

Operator, we are now ready for the first question.

Thank you.

(Operator Instructions)

Aaron Deer, Sandler O'Neill.

Hi, good afternoon, guys.

Hello, Aaron.

I guess to begin, John, you had mentioned some changes in the TDR.

I noticed it looked like maybe that you changed the way the non-accruals were reported this quarter.

Was that related to that?

Because it looks like the non-accruals, particularly maybe the 30 to 89 day past dues had bounced up.

I'm just wondering if that was due to timing noise or if there was some actual deterioration or what was going on there?

No, I don't believe there's any change in the way that we reported.

Again, we don't put a lot of focus on whether loans in that 30 to 89 bucket or 90 bucket, we look more at what the overall non-accrual level is.

That's typically our primary focus.

Okay.

And then, I guess this question would be for Jim.

The stock buyback in the quarter was particularly strong, I guess the best we've seen since first quarter of last year.

What does that mean for the remainder of this year given your expectations for liquidity at the holding company or the parent company?

Can you give us your thoughts on how you think about the buybacks vis-a-vis stock repurchases or other options given that the stock is trading well above book here?

I think, first of all, as John mentioned, we are in the process of building up our liquidity.

Secondly, in terms of the amount of availability that we have left under the stock buyback plan, that's roughly $89 million.

So, we have that capability that's left.

It will be a function of the liquidity that we generate overtime.

And in terms of what we will be guiding to in terms of what we would be doing relative to buying back stock or doing a special dividend, as we've said in the past, we haven't really communicated the price at which we are buying our stock back.

Clearly, that's something -- all of those things are items that we will be considering going forward.

Okay.

I will step back and let some others asked questions.

Scott Valentin, FBR Capital Markets.

Good afternoon, thanks for taking my question.

With regard to the margin guidance, is that for the year you see it above 4.75% or you don't see it dropping below -- or you see it dropping 4.75% any given quarter?

I think we could see it dropping below 4.75% in any given quarter.

Again, just start with the 5.08% that we reported, there's about 15 basis points of some one-time items that occur, so that takes you down to 4.93%.

I think that we will continue to see some loan yield erosion.

We had 12 basis points of the erosion in the first quarter.

I think you could see a similar type of number in the second quarter.

And then, my cautionary statement towards that is we recorded 9 basis points of NIM benefit in the first quarter on a change in our estimates for MBS prepayment speeds.

The 10-year swap rate has dropped pretty considerably since we last updated those speeds at the end of the first quarter.

So, I think you could actually see a reversal of that benefit that we had in the first quarter.

I think you can see that reverse in the second quarter.

So, I think that could be our pressure that pushes us down below that 4.75% level.

Okay, that's helpful.

Just a follow-up question.

On the $575 million of originations, was there any cadence during the quarter?

Was it slow to start and then pick up speed?

Maybe you can talk about what you are seeing in April relative to the first quarter?

I would say what we see in terms of the closings is typically you have more of your closings occur in your -- the last month of your quarter, and I think that was not different this quarter.

In terms of what we are seeing for the next quarter, in terms of the pipeline we see, we've got a lot of good loans in the pipeline and we are very comfortable with that.

We obviously don't talk about what closed each month.

We are not reporting monthly originations.

But, again, we feel that we are on a good track for the second quarter just based on the pipeline that we are seeing and deals that are being brought to credit committee.

Okay, thanks, very much.

I will hop back into queue.

Thanks.

Sameer Gokhale, Janney.

Hi, thanks for taking my question.

This question specifically about the cash flow lending business.

We all know it's been a pretty competitive market in particular.

And, you talked about repricing of existing loans prior to maturity maybe putting some pressure on yields in that business.

I just wanted to get a sense from you as far as when you say repricing, are these loans in your portfolio that you might have lost to a competitor that you decide to retain in your portfolio, and hence you keep them at a lower yield.

Is that what you mean by be repricing?

Some clarification would help.

And, what are you seeing in that business, your appetite for growing that portfolio given the particularly competitive trends in that business?

To answer your first question, in terms of the repricing, yes.

The repricing that we are doing our repricings in order to match a competitive situation where our alternative is to see that loan payoff.

And so, we are electing to retain that loan and drop the spread.

As it relates to our appetite in that business what we -- when we are in the cash flow business, our focus is really on the technology and healthcare cash flow side.

And so, we still have a healthy appetite in that business.

We think it's an area where we can add a lot of value and a lot of expertise and, quite frankly, where we have a lot of strong relationships.

Given that, that's what we're doing is focusing on that side of the business.

So, we are focusing on technology cash flow, healthcare cash flow, and we are focusing on working with a few -- a select number of sponsors.

We think that's what gives us an advantage out there as opposed to being out there in the wide leverage lending market that you hear people referring to.

Okay, that's helpful, Jim.

Just in terms of the expenses and your discussion of keep expenses flat, I believe.

As you are growing the portfolio in the low double digits, are there -- when you look at the expense base that you have, are there any specific areas you are targeting for additional cuts in expenses, which would offset increased, say, incentive-based expenses in other areas?

How should we think about your flat expenses relative to the portfolio growth?

Any expenses that are associated with the portfolio growth will continue to increase, probably at a slower rate than the overall portfolio growth, because there are some fixed infrastructure costs.

Where I would expect us to see some of the expense savings, and if you recall in the beginning of 2012, we started the process of merging together the parent and the bank back office operations, so that's continuing its process.

So, I think you'll see the corporate overhead type line items that will continue to decline.

They will be offset by other infrastructure costs that are necessary to support a larger balance sheet and loan portfolio.

Okay, that's helpful.

Thank you.

Moshe Orenbuch, Credit Suisse.

Great.

Just a couple clean up questions from some of the things that have been asked before.

You talked about rebuilding liquidity at the parent.

Did you specify a level that you wanted to reach?

What we are targeting right now, based upon looking at our models, is that we'll need a level of about $140 million.

To step back, in the past we talk about a different level.

As we continue to have discussions with the regulators and how we should look at our liquidity position and how we should think about building up that liquidity, we concluded that we need to have roughly 24 months of liquidity and only look at the uses of the funds.

We previously considered some sources of funds that we thought had some high probability.

We had to back off of that position, and so now we are only looking at the uses of funds.

So, that's about $140 million.

As we move through time, as we continue to liquidate the parent and wind down the parent, that number will continue to decline.

Any declines because there is current debt service there that would no longer be there?

There's operating expenses at the parent that will go away.

And, one-time liabilities.

And one-time liabilities.

As well as a provision for the unfunded commitments, the unfunded loans that we've got where as those loans -- as those commitments go away, the need to hold any cash to support those goes away.

Got you.

That's actually very helpful.

And then, just to round out the discussion about these loans that are repricing.

I am assuming that it's only loans that are maturing, then.

It's not digging deeper into the book of business from that line?

I would say the way that you -- when we have our loans, several of our loans -- some of them as their coming up for maturity, but a lions share of them are when the lockouts have gone away.

So, typically, for example, in the cash flow lending business, you typically have a 101 soft call in your first year and then the loan is prepayable after that.

But, you will find when the lockout goes away, or the prepayment premiums associated with that go away, is when you are apt to have a borrower look into doing a repricing.

Moshe, this is Tad.

Let me add to that.

I think we are using repricing as shorthand here.

The maturing loans we have in our model we expect all maturing loans to reprice to whatever current market is.

Current market is well below the average yield in our portfolio, so that's natural for all banks.

What we are guiding to now is this new phenomenon of non-maturing loans, borrowers coming in and saying, we are about to pay you off.

You can have your fee.

And, as Jim points out, a lot of these -- we do get fees from these.

We haven't highlighted that.

But, the fee is one time.

We'd rather have the benefit of the margin.

So, we make that choice whether to keep that loan or keep that customer or not.

When we call it repricing, those are the ones we have elected to retain the customer.

Keep the loan in the portfolio.

We still get the fee at a lower return.

Oftentimes, what we are not telling you is some of these approaches are made, we let the payoff occur.

That's not a repricing, that's a payoff.

Because we choose not to keep the client either for pricing reasons or, in today's market, most frequently credit concerns.

Because not only are these coming back to us for repricing, they are coming back with looser covenants.

Just the last thing on that would be any kind of incremental players or change in who you are seeing being aggressive on the other side of those?

No, I wouldn't say -- if anything, you are certainly seeing the CLO market is heating up again, so I would say there is more activity in that space.

But, in terms of new lenders joining that space, you are not really seeing that at all.

Okay.

Thanks, very much.

Daniel Furtado, Jefferies.

Good afternoon, thank you for the opportunity.

My first question is simply, has the timeframe, and I'm sorry if I missed this in the early part of the call, but has the timeframe for BHC application changed in your mind between last quarter and today?

No, it has not.

We had talked a lot about this last quarter that we were not going to provide the market with constant updates on our relationships and conversations with our regulators.

However, we did say that we had expectation we would complete the process by year-end, and that's still our guidance today.

Understood.

And could you -- thank you for that.

Do you mind going just from a high-level perspective, what the difference between -- or what the mechanics between returning capital in your current status versus if you were approved for BHC?

Yes.

We can talk with great clarity about the first part of that, and then we can guess along the rest of the market with the second half of it.

But, right now, the parent company is not a regulated enterprise.

You've seen a massive capital return.

We think more than any financial institution in the country.

And, that's because it's not regulated and because there's been excess capital generated by all of this cash flow.

It has been constrained by our views on the stock valuation, our view for a special dividend, and primarily parent liquidity.

Once you go into a regulated world, you introduce a new player who may have different views as to capital adequacy.

We haven't moved into that yet.

You would have to expect it to slow, but you would also have to expect it to slow because there's not much remaining there in this enterprise that's being run down.

We can't speculate any better than you can about what payout ratios the Fed, and in combination with the FDIC, might allow.

It's premature to speculate on that, and we haven't begun those conversations yet.

Understood.

Finally, more on the modeling side.

I could appreciate if you don't have this handy, but do you mind telling me what your expected CPRs went from an to for this recent quarter?

I know you are expecting an unwind of the yield benefit, but do you have roughly what the CPRs expectations went from and to on that change?

You are asking in relation to the NBS investments, is that right?

That is correct, yes, the liquidity portfolio.

I don't have those numbers handy.

I can certainly provide them to you afterwards.

Excellent.

Thank you for the time, everybody.

Jennifer Demba, SunTrust.

Thank you.

Just following up on the competition you noted during the quarter and last several quarters.

Can you just talk about where it has been the most intense by category?

I think you mentioned the technology and healthcare cash flow area.

Yes, I would say that I think where we saw it more pronounced was in the technology and healthcare cash flow area, but candidly you are starting to see it in all of the areas.

We are seeing is somewhat in our lender finance business.

We are seeing it in our commercial real estate business, and we are seeing it in our healthcare real estate business.

So, I think if you had asked me six months ago, I think it was really focused on the cash flow lending business.

And, we've now seen it spread into these other areas.

But, I would say those are the other three areas where you are seeing it more pronounced.

And is it coming from the larger banking institutions, or where generally are you seeing more pressure?

Yes, I would say you are seeing it from a lot of the larger banks, in particular, because they are getting more and more active.

So, I would say, yes, it's much more of a larger bank phenomenon than anything else.

Thanks a lot.

Steven Alexopoulos, JPMorgan.

Hi, everyone, this is actually [Frieda] on for Steve.

Most of my questions have been asked, but just a high-level one on the net interest income.

If you balance what you are saying about the loan repricing pressure and then your expectations for loan growth, do you still expect the dollars of NII to see modest growth at the bank level this year?

And, I guess what do you think the trajectory looks like off the first quarter given the one-off benefits?

I think in the near-term, I think you could still see a little bit of growth at the bank as the growth in loan portfolio helps offset the NIM compression.

But, on a consolidated basis, I would expect it to be down.

As you saw in the parent loan portfolio, there was a pretty significant amount of repayment during the quarter, the first quarter.

So, we will see a full impact of that as we enter into the second quarter.

So, on a consolidated basis, at least for this next quarter, just looking that far ahead, I would expect that the NII to decline a little bit.

Okay.

And then, maybe some relief in the back half of the year as the bank level growth kicks in?

Or you think repricing pressure is enough to offset here?

I would expected it to be flat to maybe slightly up, then, for the balance of the year.

Okay, that's helpful.

And then, just real quick, if we look at the dollars of provision expense this quarter, sorry if I missed it earlier, but how much of that increase is tied to what happened with the non-accruals?

And then, as we go forward should we expect this to pace more along with loan growth?

Right.

I think if you look at it -- if you look at the total provision, the total provision was $9 million of that was at the parent and $3 million of that was at the bank.

So, the banks was more in line with our loan growth where as the parent was more in line with specific reserves associated with a couple of the loans, one of which was the loan that went on non-accrual.

Okay, great.

Thanks, so much, for the color.

Mark DeVries, Barclays.

Yes, thanks.

Tad, given your comments about the uncertainty about the ability to return capital as a regulated bank holding company, when you file the application, would you then almost act as if you are subject to that uncertainty?

Or will you continue to act as you are, return capital subject to available liquidity until you actually get approved?

We actually don't know the answer to that either.

It's a subject of many internal conversations and some external, but we don't have a good answer to that.

Okay.

I think the one thing that we're going to have to do, obviously, is to have to have a capital plan that is approved by our Board of Directors and, ultimately, approved by the Federal Reserve.

As you all know with other banks, as you are doing your capital plan, that is subject to stress testing and the like.

The determinant of the excess liquidity, at that point, will be a function of that capital plan.

Got it.

And then, finally, on the prepayment fees you are generating from this repricing you talked about, has that been material to earnings?

If so, where is the geography?

Is that coming through net interest income or is that somewhere else?

It would show up in the loan fees line item, so it would be a non-interest income section, but it's not material to the earnings.

Okay, got it.

Thanks.

Scott Valentin, FBR Capital Markets.

Thanks for taking my follow-up.

Just two quick questions.

One, noticed that the rate on new and renewing time deposits in the quarter was up 3 basis points.

Just curious if that's -- I'm assuming that reflects competitive pressures in the market?

No, not necessarily.

It reflects the fact that rates have been near zero for so long that we finally caught up.

So, our offering rates today are actually higher than many of our maturing CDs.

And, that's why we've been guiding for flat cost of funds for sometime, and we actually think it will go up.

We've raised $200 million, $250 million in deposits.

We still don't see a lot of competition, but it is factual that we have to pay -- that we have determined the level of CDs that we can raise based on the pricing.

So, let me say that more clearly that we could force the cost of funds lower, but we would see outflows.

And so, to regulate the inflows for what we need to fund our loan growth, that's our expectation.

Flat to slightly up.

Okay.

And then, just a follow-up question on the investments security portfolio.

It looks like the margin, or that average yield, in the portfolio is up about 90 basis points from the fourth quarter.

Is that just a mix change in the portfolio?

Or any new assets or investments that were made?

The mix is a little bit of it, but it's the two nonrecurring items that we talked about earlier, so we had a change in our estimated prepayment speeds in the NBS portfolio.

And, that portfolio was largely built in a declining interest rate environment, so for the most part it's all in a premium position.

So, the prepayment -- estimated prepayment speeds had slowed, so that, under the accounting concept had reversed some of the prior amortization expense.

The second item is that we had a single CMBS bond that was purchased in a prior period at a pretty significant discount, and it had prepaid.

So, the remaining unamortized discount was accelerated.

Okay.

So, one-time items.

Okay, thanks, very much.

Thank you, everybody, for listening and for your questions.

Just a reminder that a replay of the call will be on our website later today.

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