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CapitalSource (NYSE:CSE)

Q1 2013 Earnings Call

April 29, 2013 5:30 pm ET

Executives

Dennis Oakes - Senior Vice President of Investor Relations & Corporate Communications

James J. Pieczynski - Chief Executive Officer, Director, Member of Asset/Liability Committee, President of Capitalsource Bank and Director of Capitalsource Bank

Douglas H. Lowrey - Chairman of Capitalsource Bank, Chief Executive Officer of Capitalsource Bank and President of Capitalsource Bank

John A. Bogler - Chief Financial Officer, Chief Financial Officer - Capitalsource Bank and Executive Vice President - Capitalsource Bank

Analysts

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Scott Valentin - FBR Capital Markets & Co., Research Division

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Daniel Furtado - Jefferies & Company, Inc., Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Mark C. DeVries - Barclays Capital, Research Division

Operator

Good afternoon, and welcome to the CapitalSource Inc. First Quarter 2013 Earnings Conference Call. [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.

Dennis Oakes

Thank you, Amy. Good afternoon, and welcome to the CapitalSource First Quarter 2013 Earnings Call. With me today are CapitalSource 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 this today. Our earnings press release and website provide details on accessing the archived call. We have also posted a presentation on our website, which provides additional detail on certain topics that will be covered during our prepared remarks that 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 of 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?

James J. Pieczynski

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 increased 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 1/3 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 and 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, and 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 remains strong and our resolve to make properly structured loans to creditworthy borrowers is even stronger. New loans funded in the quarter was spread among various business lines but concentrated in commercial real estate, health care and technology cash flow, multi-family 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 status this year 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?

Douglas H. Lowrey

Thank you, Jim. Good afternoon, everyone. We were very pleased with the first quarter's loan growth at 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 we expect the bank's net interest margin to decline, the asset growth we expect this year is one key to sustained earnings growth. We're 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 on our average cost last quarter. The level of CD maturity schedule 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 half 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've 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 2 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 rates. Capital levels remain strong and well above regulatory norms with a risk-based capital moving up to 16.7% and our Tier 1 leverage ratio at 13.4%.

John is up next. John?

John A. Bogler

Thank you, Tad. We indicated in our fourth quarter call that the first quarter net interest margin would benefit from the full quarter impact of the prior period loan growth, which largely occurred near year-end. That change in asset mix and higher FAS 91 amortization contributed approximately 21 basis points to net interest margin expansion this quarter, while a series of nonrecurring items add 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 drift 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 loans, 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 pay off. 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 the 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; low professional fees, generally related to workouts; a lower rate of bonus accrual given the 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 would be permanent, however, so we were 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 nonoperating expenses, are expected to total approximately $20 million this year, primarily due to continued growth of the leased portfolio. Nonoperating 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 nonaccrual loans. That increase relates primarily to 2 parent loans that were previously impaired and performing under troubled debt restructurings, but our new credit weaknesses were identified in the quarter causing loans to be put on nonaccrual 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 at 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 approximately $200 million, which would represent more than a 60% decline from 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 carryforwards to offset federal taxable income in the quarter, so that the 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 2 remaining securitizations to pay off 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 will 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.

James J. Pieczynski

Thanks, John. I want to close by highlighting what we see as the 3 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.

And 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 our 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 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. And, operator, we are now ready for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Aaron Deer at Sandler O'Neill.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

I guess, John, you mentioned some changes in the TDRs. I noticed it looked like maybe that you've change the way the non-accruals were reported this quarter. Was that related to that? And then the -- because it looks like the non-accruals particularly, maybe the 30- to 89-day past dues, had bounced up and I'm just wondering if that was due to some timing noise or if there's some actual deterioration or what was going on there.

John A. Bogler

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 are net 30, 89 day bucket or 90-day bucket. We look more what the overall nonaccrual level is and that's typically our primary focus.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

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 kind of given your expectations for liquidity at the holding company or the parent company? And can you kind of give us your thoughts on how you think about the buyback, vis-à-vis, the stock repurchases or other options given that the stock is trading well above book here?

James J. Pieczynski

Well, I think, first of all, as John mentioned, we're 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 over time. And in terms of what will we be guiding to, in terms of what we would be doing relative to buying back stock or doing a special dividend, kind of as we said in the past, we haven't really communicated the price at which we're buying our stock back. So clearly that's something -- all those things are items that we will be considering going forward.

Operator

Our next question comes from Scott Valentin at FBR Capital Markets.

Scott Valentin - FBR Capital Markets & Co., Research Division

Just with regards to the margin guidance. Is that for the year, you see it above 475? Or you don't see it dropping below -- or you see it dropping below 475 in any given quarter?

Douglas H. Lowrey

I think we could see it dropping below 475 in any given quarter, and you can just start with like the 508 that we reported, there's about 15 basis points of some one-time items that occurred, so that takes you down to 493. And I think that we'll continue to see some loan yield erosion. We had 12 basis points of erosion in the first quarter. I think you could see a similar type of number in the second quarter. And then because of my cautionary statement towards that is we recorded 9 basis points of NIM benefit in the first quarter on the change in our estimates for MBS prepayments 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 can 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 475 level.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay, that's helpful. And then just a follow-up question. On the $575 million in originations, was there any kind of cadence during the quarter? Was it slow to start and then pick up speed, maybe can you talk about what you're seeing in April relative to the first quarter?

James J. Pieczynski

Yes, I would say what we see in terms of the closings is typically you have more of your closings kind of occur in your the last month of your quarter, and I think that was not different this quarter. In terms of what we're 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're very comfortable with that. We obviously don't talk about what closed each month. We're not reporting monthly originations. But again we feel that we're on a good track for the second quarter, just based on the pipeline that we're seeing and deals that are being brought to credit committee.

Operator

The next question comes from Sameer Gokhale, Janney.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Just a question specifically about the cash flow lending business, and we all know it's been 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. Now, I just wanted to get a sense from you as far as when you say repricing, these loans in your portfolio that you might have lost to a competitor that you decide to retain in your portfolio and, hence, you kind of keep them at a lower yield, is that what you mean by repricing and 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?

James J. Pieczynski

All right, to answer your first question, in terms of the repricing, yes, the repricings that we're doing are repricings in order to match kind of a competitive situation where our alternative is to see that loan payoff, and so we're 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 health care 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. And so given that, that's what we're doing, is focusing on that side of the business. So we're focusing on technology cash flow, health care cash flow and we're focusing on working with a few kind of select number of sponsors. And so we think that's what gives us an advantage out there as opposed to being out there in kind of the wide leveraged lending market that you hear people referring to.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay, that's helpful Jim. And then just in terms of the expenses and your discussion of keeping expenses flat, I believe, as you're growing the portfolio in kind of the low double digits. I mean, 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 rather the portfolio growth?

John A. Bogler

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. Expect us to see some 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, and so that's continuing its process, and so you can see the corporate-overhead-type line items that will continue to decline and then they'll be offset by other infrastructure costs that's necessary to support a larger balance sheet and loan portfolio.

Operator

Our next question comes from Moshe Orenbuch at Credit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Just a couple of kind of like cleanup questions from some of the things that have been asked before. You talked about rebuilding liquidity at the parent. Could you kind of specify a level that you wanted to reach?

John A. Bogler

Well, what we're targeting right now, based upon kind of looking at our models, is that we'll need a level of about $140 million. And to step back, in the past, we've talked about a different level, we've continued 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 funds. We previously considered some sources of funds that we thought had some high probability. We had to back off of that position, so now we're only looking at the uses of funds, and so it's about $140 million. And then as we move through time, as we continue to liquidate the parent and wind down the parent, that number will continue to decline.

Moshe Orenbuch - Crédit Suisse AG, Research Division

And it declines because there's current debt service there that would no longer be there?

John A. Bogler

There's operating expense at parent that will go away.

James J. Pieczynski

And one-time liabilities.

John A. Bogler

And one-time liabilities, yes.

James J. Pieczynski

And as well as 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 cap -- cash to support those goes away.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Got you. That's actually very helpful. And then just to kind of round out the discussion about these loans that are repricing. I'm assuming that the -- it's only loans that are maturing then, right, it's not digging deeper into the book of business?

James J. Pieczynski

I would say the way that you -- we have our loans, several of our loans, some of them are as they're coming up for maturity, but a lion's 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. The old saying when a lockout goes away or the prepayment premiums associated with that go away is when you're apt to have a borrower look into doing a repricing.

Douglas H. Lowrey

Moshe, this is Tad. Let me add to that. I think we're 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're guiding to now is this new phenomenon of non-maturing loans borrowers coming in and saying, we're 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. So when we call it repricing, those are the ones we've elected to retain the customer, keep the loan in the portfolio, we still get the fee at a lower return. Oftentimes, what we're 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're coming back with looser covenants.

Moshe Orenbuch - Crédit Suisse AG, Research Division

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

James J. Pieczynski

No, I wouldn't say -- if anything, you're certainly seeing the CLO market is heating up again, so I would say, there's more activity in that space. But in terms of new lenders joining that space, you're not really seeing that at all.

Operator

Our next question comes from Daniel Furtado at Jefferies.

Daniel Furtado - Jefferies & Company, Inc., Research Division

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

James J. Pieczynski

No, it has not. We had spoke -- we 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.

Daniel Furtado - Jefferies & Company, Inc., Research Division

Understood. And 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?

James J. Pieczynski

Yes. We can talk with great clarity about the first part of that and then we can guess along the rest of the market for the second half of it. But right now the parent company is not a regulated enterprise and 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 this cash flow, it has been constrained by our views on the stock valuation, our view for 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, and 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.

Daniel Furtado - Jefferies & Company, Inc., Research Division

Understood. And then finally, more on the modeling side, I can appreciate if you don't have this handy. But do you mind telling me what you're expected CPRs went from and to for this recent quarter? I know you're expecting unwind of the yield benefit, but did you have kind of roughly what the CPRs expectations went from and to on that change?

John A. Bogler

You're asking in relation to the MBS investments, is that right?

Daniel Furtado - Jefferies & Company, Inc., Research Division

That is correct, yes, the liquidity portfolio.

John A. Bogler

I don't have those numbers handy. I can certainly provide them to you afterwards.

Operator

Our next question comes from Jennifer Demba at SunTrust.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Just following up on the competition you noted during the quarter and last several quarters. Can you just talk about where it's been the most intense by category? I think you mentioned the technology and health care cash flow area.

James J. Pieczynski

Yes, I would say that I think where we saw it more pronounced was in the technology and health care cash flow area. But candidly, you're kind of starting to see it in all the areas. We're seeing it somewhat in our lender finance business, we're seeing it in our commercial real estate business and we're seeing it in our health care real estate business. So I think if you would've asked me 6 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 3 areas where you're seeing it more pronounced.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

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

James J. Pieczynski

Yes, I would say you're 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.

Operator

Our next question comes from Steven Alexopoulos at JPMorgan.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

This is actually Preeti Dixit on for Steve. Most of my questions have been asked but just a high-level one of the net interest income. If you balance what you're 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?

John A. Bogler

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 -- if you saw in the parent loan portfolio, there was a pretty significant amount of repayment during the quarter, the first quarter, and so we'll see a full impact of that as we enter in 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.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Okay. And then maybe similarly from the back half of the year as kind of the bank level growth kicks in? Or you think repricing pressure is enough to offset here?

John A. Bogler

I would expect it to be kind of flat to maybe slightly up for the balance of the year.

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

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?

James J. Pieczynski

Well, 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 bank was kind of more in line with our loan growth whereas 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 nonaccrual.

Operator

The next question comes from Mark DeVries at Barclays.

Mark C. DeVries - Barclays Capital, Research Division

Tad, given your comments about the uncertainty about the ability to return capital as a regulated bank holding company, when you filed the application would you then almost act as if you kind of subject to that uncertainty? Or will you continue to kind of act as you are return capital subject to available liquidity until you actually get approved?

Douglas H. Lowrey

We actually don't know the answer to that either. We have -- it's a subject of many internal conversations and some external, but we don't have a good answer to that.

I think the one thing that we're going to have to do, obviously, is to have to have a capital plan that's approved by our Board of Directors and ultimately approved by the Federal Reserve. And as you all know with other banks, as you're doing your capital plan, that's subject to stress testing and the like, and so the determinant of the excess liquidity at that point will be a function of that capital plan.

Mark C. DeVries - Barclays Capital, Research Division

Got it. And then finally on the prepayment fees you're generating from this repricing you've talked about that occurred, has that been material to earnings? And if so, kind of where is the geography, is that coming through in net interest income or is that somewhere else?

John A. Bogler

It would show up in the loan fee [indiscernible] so it would be in the noninterest income section, but it's not material to the earnings.

Operator

And our last question comes from Scott Valentin at FBR Capital Markets.

Scott Valentin - FBR Capital Markets & Co., Research Division

Just 2 quick questions. One, noticed that, I guess, the rate on new and renewing time deposits in the quarter was up 3 basis points. Just curious if that's -- I assume that reflects competitive pressures in the market?

Douglas H. Lowrey

No, not necessarily. It reflects the fact that rates have been near 0 for so long that we finally caught up, and so our offering rates today are actually higher than the many of our maturing CDs and that's why we've been guiding for flat cost of funds for some time, and we actually think it will go up. We've raised a couple of hundred 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.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. And just a follow-up question on investment securities portfolio. It looks like the margin or that average yield in the portfolio is up about 90 basis points through the fourth quarter, that's just a mix change in the portfolio or any new assets or investments that were made?

John A. Bogler

The mix is a little bit but it's the 2 nonrecurring items that talked about earlier, so we had a change in our estimated prepayment speeds in the MBS portfolio. And that portfolio was largely built in a declining interest rate environment so for the most part it's all in the premium position. And so the prepayment, estimated prepayment speeds had slowed so that under the accounting concept that reversed some of the prior amortization expense. And 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.

Dennis Oakes

Well, thank you, everybody, for listening and for your questions and just a reminder that a replay of the call will be on our website later today. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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