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Executives

Dennis Oakes - Senior Vice President of Investor Relations

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

Douglas H. Lowrey - Chief Executive Officer of CapitalSource Bank, President of CapitalSource Bank and Director 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

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

Mark C. DeVries - Barclays Capital, Research Division

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

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

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

CapitalSource (CSE) Q3 2012 Earnings Call October 30, 2012 5:30 PM ET

Operator

Good afternoon, and welcome to the CapitalSource Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dennis Oakes. Please go ahead.

Dennis Oakes

Thank you, Amy. Good afternoon, and welcome to the CapitalSource Third Quarter 2012 Earnings Call. With me today are CapitalSource CEO, Jim Pieczynski; CapitalSource Bank Chairman and CEO, Tad Lowrey; and John Bogler, our Chief Financial Officer.

This call is being webcast live on the company website and a recording will be available later this evening. Our earnings press release and website provide details on accessing the archived call. We have also posted a presentation on the website, which provides additional detail on certain topics, which we will be covering during our prepared remarks, though we will not be making specific references to that presentation.

Investors are urged to carefully read the forward-looking statements' language in our earnings release and 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 is up first, and as usual, we will take questions following our prepared remarks. Jim?

James J. Pieczynski

Thank you, Dennis, and good afternoon, everyone. First and foremost, I want to extend my thoughts and prayers to those people on the East Coast who have had to deal with the impact of Hurricane Sandy, I know it's been difficult for people there and we do think of you.

I would now like to focus on our quarterly results. Our third quarter included earnings per share of $0.14 and once again, demonstrated the earnings power of CapitalSource Bank. Tad will provide greater detail on the bank's performance but we were pleased with the new loan production of $623 million, a net interest margin of just below 5%, an ROA of just under 1.9%, a negligible loan loss provision and significantly higher pretax pre-provisioned income.

Our consolidated credit metrics also improved meaningfully as our deliberate action to move or sell troubled loans continues. Our specialty lending platforms continue to produce at a high level, new lending in the third quarter was broadly spread among our business groups. But the largest concentrations were in equipment finance, technology and health care cash flow and our health care and general real estate group.

Despite the solid level of loan production, our net loan growth at the bank in the quarter was only $24 million. This was due principally to $470 million of loan repayments which were high, but that was combined with planned portfolio management action that further reduced loan growth by just over $160 million. Tad will provide more detail on those activities.

At the parent company, we generated free cash of approximately $63 million in the third quarter, which allowed us to continue our stock buyback program. We repurchased 10 million shares at a cost of $75 million during the quarter, and then subsequent to quarter end, we purchased an additional 5 million shares at a cost of $38 million. We have now returned almost $770 million to shareholders in the form of share repurchases, while we reduced the outstanding share count by 36% since December of 2010.

With the previous plan nearly completed earlier than expected, our Board of Directors last week approved the new share buyback program to run through the end of 2013 with authority for $250 million of new share repurchases. Based on our liquidity forecast, we can complete that program over the next 14 months, though stock price, stress testing, dividends and the timing of our bank holding company application will be additional factors in our buyback decision over that period. The new buyback plan is consistent with our frequently discussed objective of prudently returning excess parent capital to our shareholders. While such share buybacks have been the primary means of returning excess capital, and we expect to continue them subject to market conditions and other developments, we are also considering other mechanisms to return additional capital in the short term, such as increasing our ordinary dividend, instituting a variable dividend and/or issuing a special dividend.

As we look towards 2013, we continue to prepare for the filing of our bank holding company application. The current very low interest rate environment, which is favorable to our particular deposit gathering model, means there is no immediate need for us to get bank holding company status and convert to a commercial charter. However, the prospect of lower capital requirements, the ability to offer an array of deposit products and business services and the ability to make acquisitions are other benefits of the charter conversion, so we still anticipate filing our application next year. But we will file pursuant to FRB guidance, which we expect to receive in the near future about when our filing should take place, and consistent with our judgment about the time that will best facilitate their prompt review. Tad is up next.

Douglas H. Lowrey

Thank you, Jim. Good afternoon, everyone. The third quarter at CapitalSource Bank was solid in all respects. I'll turn first to the bank's income statement. Net interest income increased 4% from the second quarter to $84 million, while operating expenses declined, producing pretax, pre-provisioned income of $58 million, which was 17% higher than last quarter. Our net interest margin was up slightly at 4.97% which is the top end of the range that we've been projecting of 4.75% to 5%. The net loss provision was negligible in the third quarter compared to $13 million in the second quarter as we benefited from a $5 billion recovery on a restructured loan that we sold in the quarter. But more important than the low provision, our total nonperforming assets are now below 1% for the first time in nearly 4 years, and shortly after the bank's formation. The biggest factor in this achievement was a 37% decline in non-accruals, resulting from payoffs, pay-downs, loan sales and a reduced rate of new non-accruals in the quarter. Despite the very low provision in the quarter, our allowance for loan and lease losses as a percentage of non-accruals still increased to 153% compared to 100% in the second quarter. Charge-offs were also down and trailing 12-month charge-offs dropped below 1% to 79 basis points. The bank continues to carry elevated capital levels with the risk-based capital ratio at 16.7% and a Tier 1 leverage ratio of 12.8%. Both of these metrics increased from the prior quarter and are well above our current regulatory requirements, and fully phased in Basel III minimums as currently proposed. Our high capital levels give us balance sheet strength, as well as the capacity to grow and pay future dividends. We were also quite pleased with our ROA, return on average assets, of 1.88% and our return on equity of 12.75% in the quarter, despite those high levels of capital, although these were assisted by the very low loan loss provision this quarter.

Moving to the liability side. Deposits were up by 3% and now stand at $5.5 billion, while our deposit cost declined another 2 basis points to 93 basis points, new and renewed deposits added in the quarter came in at 86 basis points. The high level of loan repayments also caused our cash and investments to increase by $177 million, but we hope to utilize that excess liquidity in the fourth quarter to fund loans. As a result, we intend to curtail raising additional deposits until the pace of loan repayments subsides or we have sufficient net growth to warrant proactively raising deposits again.

Before closing, I want to talk a little bit about the portfolio on management actions that Jim referenced early -- earlier that we took in the quarter to reduce classified assets and lower our whole sizes. Classified assets at the bank were reduced by 90...

[Audio Gap]

Our largest borrower relationship by more than 1/2, reducing the outstanding commitment from $127 million to $59 million. As a result, classified assets at the bank are now stand at $161 million and we have only one remaining individual loan in excess of $80 million. We're very pleased with this progress, and we do not expect our portfolio management activities in future quarters to be of similar magnitude, although our focus on credit management will continue.

The third quarter loan repayments were elevated due to a high level of payoffs, as certain of our borrowers refinance for lower rates, while others have their businesses acquired. In several cases, we chose not to participate in the renewal or the refinancing for the new loans due to credit or pricing concerns, that we believe are reflective of the current lending environment, which Jim will describe in more detail in his closing remarks. John will now provide his perspective on the quarter, followed by Jim's closing remarks. John?

John A. Bogler

Thank you, Tad, and thank you to those listening to our earnings call this afternoon. My remarks today will focus on third quarter earnings factors, including utilization of the DTA, operating expenses, parent liquidity and consolidated credit performance. Our consolidated earnings per share of $0.14 in the quarter was recently straightforward without one-time items. It would be fair, however, to strip out a $0.01 net tax benefit resulting from tax adjustments, including an additional release from the valuation allowance associated with tax basis mark-to-market adjustments on legacy parent debt and equity investment.

We indicated at the time that our large deferred tax asset valuation allowance was reversed last quarter, now we've experienced a 41% GAAP tax rate going forward. Our effective rate for the third quarter was 41% at the bank, while a small net tax benefit reduced the consolidated rates to 37%. We continue to view our consolidated effective tax rate as 41% since any future tax base of capital gains or losses associated with parent debt or equity investments are uncertain.

In addition to the effective GAAP tax rate, it is important to remember that our cash taxes will be significantly lower until September as we have fully utilized substantial federal NOL on the parent balance sheet. The only cash taxes we paid in the third quarter where approximately $3 million for state and local taxes, which produced an effective cash tax rate of only 6%. The difference between our GAAP and cash tax liabilities effectively free cash at the parent because of the tax sharing arrangement between the bank and the parent which results in the bank paying up to the parent at full tax amount due as if it were a stand-alone filer.

Parent cash flow was strong in the third quarter. Unrestricted cash at September 30 was $156 million, a decline of only $35 million from the end of the prior quarter, despite our expenditure of $75 million for share repurchases, and $23 million to redeem the remaining outstanding 7.25% convertible debentures. Loan repayments in the non-secured-type portfolio of $65 million were the principal source of cash in the quarter. We expect cash generation during the fourth quarter of $50 million to $75 million from that portfolio, which had the balance of $316 million at quarter end.

Included in that estimate is $40 million in loans moved to held-for-sale in the quarter, which we expect to sell by year end. Following retirement of the converts in July, we have no parent company recourse debt maturities until the first trust deferred mature in 2035. The annual debt service on those securities of approximately $10 million at current interest rate will be paid with available cash flow.

With regard to operating expenses, which we define as excluding debt extinguishment, operating lease depreciation, provisions for unfunded commitments and REO expense, we are well on our way to achieving the year-over-year savings we projected as 2012 began. Consolidated operating expenses declined by $9 million in the third quarter due largely to decreased loan servicing extent and a one-time office lease termination charge incurred in the second quarter. Loan servicing expense has been uneven from quarter-over-quarter, so we continue to spend less on third-party work-out and servicing-related fees so we expect that item will come down a bit further over time.

Operating expenses for the first 3 quarters of this year were approximately $140 million compared to $154 million through the first 3 quarters of last year, a 9.2% reduction. We are confident, therefore, that we'll meet our targeted range of $190 million and $200 million with total consolidated operating expenses for the full year of 2012. In fact, we now expect our full year operating expenses to be at the low end or below that projected total, such that savings will be at least 10% this year compared to last.

Turning now to credit. Tad spoke a bit about the credit performance of the bank this quarter, but our consolidated metrics were equally strong as non-accruals declined by $40 million and are now only 2.7% of total loan. Our consolidated loan loss reserve of $127 million or 2.1% due to continued decline over the next 2 to 3 years to what we project will be a normalized level of approximately 1.5%. Net charge-offs were also down significantly in the quarter and over the past 12 months declined to just 2.1% of average loan. The quarterly loan loss provision at $9 million was within our expected range. While the credit performance for the quarter was very positive and consistent with our overall trends for the last several quarters, we remain cautious on the long-term macro environment. As a result, we took the steps already mentioned during the quarter to reduce problem assets and lower whole sized on larger legacy loans still in our portfolio. Though the number of loans for which we might take similar actions in the future is getting smaller, we remain focused on prudently reducing credit exposure across our loan portfolio, both as a prerequisite to funding our bank holding company applications and consistent with the underwriting standards we applied to new loans since the formation of the bank in July of 2008. In short, credit discipline is an ongoing focus for the entire organization, both in terms of our existing portfolio and new loans we are making.

Jim will now conclude the prepared portion of the call.

James J. Pieczynski

Thanks, John. And before taking question, I want to talk briefly about the lending environment as we see it today. With the first month of the fourth quarter, already behind us, loan production has been positive and the strength of our pipeline across our business segments is encouraging. Though we are seeing a heightened level of deal activity, much of it is related to refinancing as there is a tremendous amount of liquidity-chasing deals. Not surprisingly, that is manifesting itself in persistent pricing pressure, which we are now seeing more broadly across our business segments than we did earlier in the year. This increased activity is at least in part a byproduct of the Fed's action to keep interest rates artificially low. With those low rates expected to stay in place for some time, it is likely that pricing pressure will continue and may intensify.

Though we will be competitive on price, we are walking away from deals that do not meet our return threshold our which carry certain leverage multiples, covenant-like terms or pick toggle features that we find objectionable. We are willing to sacrifice production volume in loan growth if necessary in order to feel secure about the structure and credit quality of the loans we do make. It is incredible to us that memories of others are so short with the depths of the last cycle less than 4 years in the rearview mirror, particularly in light of the macro economic uncertainty around the fiscal cliff, Europe, China and more. We do, however, believe that our very diverse and national specialty lending franchise uniquely positions us to find direct lending opportunity that the produce the returns we seek while meeting our growth and profitability targets. As a result, we intend to stay the course, maintain our pricing and underwriting discipline and stick to a credit-first mentality.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

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

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

Jim, I'd like to maybe start by following up on your -- any comments with respect to kind of the pipeline. I just wondered if you could give us a sense of where -- in terms of how you measure that pipeline and where that stood or where that stands today versus where it was 3 months ago. And then also just with respect to your comments on pricing pressures, maybe If we could get a sense of where currents yields are -- or current loans are being priced today versus loans that are coming off the books?

James J. Pieczynski

Well, first of all, when I look at the pipeline, the way I measure the pipeline is I look kind of by the deals that we have approved, so the deals that we've got approved are deals that I know are going to be happening and it's just a matter of time. And I would say when I look at that pipeline, I think it looks very similar to where it was, say, 3 months ago. However, when I look into the -- beyond this next quarter, that's when you get a little concerned about what's the pipeline going to be looking like. So that's where the jury is still out a little bit. In terms of pricing, again, I look at what's the pricing coming in on the deals that we see in our pipeline. To put it in perspective, this quarter, the average yield for new originations was at 6.17% yield, which is slightly down, which is down 4 basis points from where we were in the second quarter. If you look at where it we're seeing in the fourth quarter right now, the number is lower than that, and quite honestly, I could see that being below the 6 level when we look -- we we're in the 4th quarter. So that's what I -- where I see kind of the pricing pressure manifesting itself.

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

Okay, that's helpful. And then on a related point, I guess, the security sealed books like that actually improved sequentially. Just wondered if that was because a smaller level of prepayments or if there was something new added, what might be helping given that some boost in the quarter?

John A. Bogler

No there were no significant adjustments to the investment securities yield during the quarter. We continue to add some investments. For the most part, those are in a duration that's probably in the 3.5 or 4-year, and as you know, in the agency market is fairly low yielding. In the second quarter, we had a little bit of a change in prepayment, fee assumptions, which pushed the second quarter down just slightly, but not material quarter-over-quarter.

Operator

Our next question comes from Jennifer Demba at SunTrust.

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

I was wondering if you could just elaborate on the competitive environment a little bit more. Are you seeing this tougher competition from new entrants into these niches or is it the same competitors that you have been seeing for a while?

James J. Pieczynski

No, I would say the competitors are still the same. We're not seeing any new entrants coming into this space.

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

Okay. And just wondering if you can -- I'm sorry, housekeeping question. The expense guidance that you gave before. Could you repeat that and just give some color behind the moving parts that you're expecting?

Douglas H. Lowrey

Yes, in the second quarter, we had a $2.3 million charge for an abandonment of a lease associated with some office space that we had. We also had some increased expenses associated with loan servicing and work-out. In the third quarter, we did not have those items that repeated. So as we go forward, what we look to see is the continued benefits of integrating the back office operations of the Parent and the bank, and that will be the primarily benefit, I think, that we'll see as we go into the fourth quarter.

Operator

Our next question comes from Mark DeVries of Barclays.

Mark C. DeVries - Barclays Capital, Research Division

First, I just want to go back to the last comment on the competitive landscape. Can you talk about what the implications are for the pricing pressure for what your NIM guidance has been?

James J. Pieczynski

That's a good question. I think the advantage that we have is, we do have a fair amount of liquidity and as Tad had mentioned in his remarks, we're going to be holding off on growing our deposits because of the fact that we've got a significant level of cash that we can invest. So when we're kind of looking at our NIM and the NIM guidance that we had has been in that 4.75% to 5% range, we think despite the fact that we'll see some lower yields on the loans that we originate, we still expect to stay in that 4.75% to 5% NIM range.

Mark C. DeVries - Barclays Capital, Research Division

Okay, great. And then on a separate note, when we think about buybacks going forward, should that match the cash flow that you have coming into the parent or is there some additional cash that you have in there -- where your buybacks could actually exceed that?

John A. Bogler

No. What we've indicated in terms of the new buyback program, the $250 million buyback program, that's intended to match the cash that we expect to generate at the parent, including any excess cash that we currently have. So the combination of those 2 represents the amount of cash that we'd be able to return to shareholders.

Mark C. DeVries - Barclays Capital, Research Division

Okay. And then for the tax sharing agreement, the contribution that, that generates on a quarterly basis, is that roughly your 41% debt tax rate less than 6% or so cash tax that you're paying? Is that how we should think about what that contribution is?

John A. Bogler

Yes, the net contribution, that's correct. I would modify that just a little bit because the 41% is our GAAP tax rate and so our -- kind of our federal and state tax rate, the cash taxes that would actually pay could be slightly different from that, that's the normal book-tax-type differences.

Mark C. DeVries - Barclays Capital, Research Division

Okay. And did you also indicate that next quarter, you expect on top of that $50 million to $75 million of cash coming in, that includes the $40 million of loans that you have held for sale now?

John A. Bogler

We expect that the non-securitized portfolio -- out of that we expect between $50 million and $70 million associated loan sales, of which $40 million fits in the held for sale bucket as of the end of the third quarter.

Mark C. DeVries - Barclays Capital, Research Division

Okay, so that's just $50 million to $75 million from loan sales alone. Not necessarily any other repayments that might come in?

James J. Pieczynski

No, it's inclusive of that as well. All sources from that portfolio. But the biggest component is the loan that's held for sale.

Mark C. DeVries - Barclays Capital, Research Division

Okay, got it. And then one of the question -- was there any material P&L impact from the portfolio management activities in the quarter?

James J. Pieczynski

No. The portfolio management activities were concentrated in the bank. And there were some charge-offs impacts that those charge-offs were primarily execution on previous specific valuation allowances. So the net provision at the bank was near 0, and it was $13 million in the prior quarter. So we did experience charge-offs as a result of that, but very little P&L effect.

Operator

Our next question comes from Henry Coffey at Sterne Agee.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

If you were trying to put a finger at where we are in the cycle, I mean, I know in the past, it starts with banks don't want to make loans to your customers and threaten them at gunpoint. Then there's sort of a stabilizing cycle, and then suddenly, banks, they're doing what they're doing now, they come rushing in on pricing. Eventually they dropped credit, and then one day, they wake up and they're trying to steal a few loans away from you, they try to buy the whole commercial finance entities and -- I mean, if that's the cycle of the past, is there any reason to believe that we won't wake up one day and find out that the banks that wouldn't buy a commercial finance business, if their life depended on it, are suddenly out making acquisitions, and then towards the end of the cycle, M&A activity picks up and it gets kind of rocky again or do you think we're in a more disciplined environment this time?

James J. Pieczynski

Well, I think this time, where it will ultimately end, I don't know. What I can see is earlier this year, we started to see it more on the pricing side of it, and I said, okay I understand that rates are dropping and so we understood the pricing side. What we've been seeing more now of late is leverage multiples are creeping up, you're seeing more covenant-like deals. You're just seeing kind of the structure that's changing right now. So when I look at it, I worried about the pricing before. Now you look at the structure and you say, okay, I get a little bit worried about that. Where that ultimately goes, I don't know. But it's clear that there's a lot of liquidity in the system right now, and you've got a lot of banks that are really trying to put that liquidity to work in some way because as we know, any yields you can get on any of those securities portfolio are miserably low right now.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

So today, the volume leaders, the lucky price takers are the banks, not the hedge funds, not the rig BDCs or is it sort of across the board?

James J. Pieczynski

I think it's a little bit across the board because although you've got the banks that are certainly leading the way, you saw the BDCs out there that are able to get attractive rediscount lines from banks on their own. So they're getting a benefit of a lower cost environment as well.

Douglas H. Lowrey

I can't imagine, Henry, that the next step is not acquisition. When you have these banks with excess capital, excess liquidity and some of the target credit metrics had improved dramatically, and then all the pressures with the regulatory compliance and the Dodd-Frank stuff, if you put all that together, it's hard to imagine those who are competing very hard on price, at some point, wouldn't turn towards acquiring...

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Are we in a regulatory environment -- I mean, you're dealing with bank regulators right now. We have a client, a private client whose had the same situation, they finally just gave up. But the bank regulators seem just as crazy as always, no offense. And are they willing to allow these kind of acquisitions to go forward or is that kind of a later stage development?

Douglas H. Lowrey

Yes, well, first of all, let me say our particular bank regulators are not crazy, we love them.

Second, second is, yes, I think they will. I think the regulators -- they have to be agnostic about this stuff. But if you have 2 companies combining and reducing expenses and reducing pricing pressure, I would have to think they would be in favor of that, particularly if these companies are both regulated financial entities. If you mean outside of regulated entities, I think they will continue to look at those very closely.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

They would approve sort of what we'll call club mergers, mergers inside the banking industry, as long as it reduced risk and exposure?

Douglas H. Lowrey

I think those are slam dunks, yes.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

What about the hedge fund community? I can remember in the set of '06, '07 cycle walking in and there were always 2 guys at the Bloomberg, just about to start a CDO, is that -- that hasn't opened up yet, has it?

James J. Pieczynski

No, we're not seeing that at all.

Operator

Our next question comes from Daniel Furtado, Jefferies.

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

The first is -- and I'm sorry if I missed this, but could you speak to or give some color around the movement in first-days delinquencies in the quarter?

Douglas H. Lowrey

Yes, it's fairly complicated. We have a fairly significant loan -- equipment loan, that became delinquent and it's fairly -- I'm trying to figure out how can I can summarize it. It's a loan secured by a number of pieces of equipment. The company is in bankruptcy, and they're paying on most of the pieces of equipment. The portions they're not paying on, we've already taken our hit, we've already provided for the expense of that. We're reporting that entire credit as a delinquency, although we're collecting payments on the greater portion of that, and we're reducing the principal by those payments. So we think we're treating it conservatively, but who's to say how long that will continue, how long those payments will continue. So that's an asset that's already been in all the troubled categories that recently became delinquent.

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

Got you. So the takeaway is it's one specific issue as opposed to anything.

Douglas H. Lowrey

Yes. We're not seeing any -- yes, if your question was more trend based, we're not seeing -- almost all of our credit indicators are positive on this quarter from last quarter. And the one that we think is a better leading indicator for us are classified assets, goes to delinquencies.

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

Right. Understood, understood. And then the other one is really just more of a modeling, and I'm not sure if you even have this number in front of you, but what the CPR was on that securities portfolio during the quarter?

Douglas H. Lowrey

No, I don't have that information in front of me. I can get back to you on that.

Operator

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

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

Just with regard to the originations. Any portfolio purchases in there, bulk purchases, in that $623 million?

James J. Pieczynski

No.

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

No, okay. And then on the payoffs, any benefit to margin at all from some of the repayments, any early repayments?

John A. Bogler

Yes, in terms of the loan yield that we had for the quarter, 70 basis points of that came from all forms of amortization of discounts and FAS 91 costs, compared to 65 basis points in the prior quarter.

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

Okay. So about a 5 basis point benefit from the prior prepayments, okay.

John A. Bogler

Yes. That's just on the loan yields. So you'd have to translate that to NIM and -- so then you're talking probably about 3 basis points, 3.5.

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

Okay, all right. And then just last question. I know you guys -- the liquidity you have press as hard on deposit growth, but CD rates were up a little bit late in the quarter, I think, 3 basis points. Just curious if that's a reflection of the competition you're seeing in the market?

Douglas H. Lowrey

No, it was -- if you see our rates going up, it's probably just an indication of how aggressive we want to be in the market. And we thought -- we would have told you a quarter ago that we were going to be very aggressively raising deposits because we didn't forecast this high degree of loan repayments and portfolio activities, we did exceed our target on origination, but the net growth is all that needs to be funded. So it's just a reflection of how aggressive we are in the local market. We've not seen indications of pricing pressure there.

Operator

Our next question comes from Steve Alexopoulos at JPMorgan.

Dennis Oakes

Amy, looks like we lost him. Are there others in line?

Operator

There are not.

Dennis Oakes

All right. Well, thank you, everybody, for listening today, and a replay of the call will be available on our website later this evening. Thanks very much.

Operator

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

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