PacWest Bancorp (PACW) 2008 Q4 法說會逐字稿

Hello and welcome to the CapitalSource fourth quarter and full year 2008 earnings conference call.

All participants will be in listen-only mode.

There will be an opportunity for you to ask questions at the end of today's presentation.

(Operator Instructions).

Please note, this conference is being recorded.

Now I would like to turn the conference over to Dennis Oakes, Vice President of Investor Relations.

Mr.

Oakes, you may begin.

Thank you very much.

Good morning, everyone.

Thanks for joining the CapitalSource fourth quarter and full year 2008 results and the Company update call.

Because of the depth of information we're providing in our prepared remarks this is morning, we expect today's session may run somewhat longer than usual.

With me are John Delaney, our Chairman and CEO, Dean Graham, our President and Chief Operating Officer, and Tom Fink, our Chief Financial Officer.

The call is being webcast live on the website and a recording will be available beginning at approximately 12:00 noon today.

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

Investors are urged to read the forward-looking statements language in our earnings release, but essentially it says 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.

More detailed information about risk factors can be found in our reports filed with the SEC.

I will turn the call over now to John Delaney.

John.

Thanks, Dennis.

Good morning, everybody, and thanks for joining us.

While this is our earnings call for the fourth quarter and -- 2008 results, we will spend just a short amount of time on the actual results and instead want to devote more time to additional areas that we think are important for you to understand.

We realize investors want to have as much information as possible about the Company, and we're happy to provide it.

We would like you to understand how we think about the business and what the thought process is underlying the decisions we make.

We always act in a manner we think will produce the long-term success for the Company and believe we have made the right strategic moves.

By providing this additional information today, we hope you will gain additional insight into the important challenges and opportunities facing us.

Specifically this morning, I will discuss the several components of value we see in the business, our strong capital position, and credit with a particular focus on our legacy loan portfolio.

Tom Fink, our CFO, will review our fourth quarter performance and talk about our funding and liquidity, and Dean will touch on a few as secretaries of CapitalSource Bank and provide some parameters around which to think about our 2009 financial performance.

I will then have some summary points to make in conclusion.

Of course we're also happy to answer any questions you have about these items, the quarter or other topics, during the Q&A session.

I want to reiterate that it is our hope that upon conclusion of this call, you will agree with our assessment that CapitalSource has greater potential and greater value than the current market implies.

At a minimum, you will have all the facts and you can make your own informed decisions.

To start, Tom will talk briefly about the fourth quarter results.

Thank you, John, and good morning, everyone.

Just got a few points to make about our results, as our release is very descriptive and we have a lot of additional information we want to cover on the call today.

Also we did preview the quarter a few weeks ago, and the big drivers of our fourth quarter results are consistent with what we previewed.

In short, the fourth quarter was a difficult quarter, both for the economy in general and also for CapitalSource.

Our quarterly results were a net loss of $1.07 per dilute share and adjusted earnings of $0.55 per diluted share.

As previously disclosed, the fourth quarter results were impacted most significantly by the substantially higher provision for loan losses.

Joe will give some more insight on credit a little later in this call.

But in summary in the fourth quarter we recalibrated our credit outlook for what we see happening in the US economy; how it impacts specific loan situations, as well as how it informs our general view of the loss inherent in our portfolio.

Provision you see this quarter is consistent with what we -- with that view as we funded higher charge-offs and funded a significant build in our reserves.

Charge offs this quarter were $184 million, compared to $85 million in charge-offs during the third quarter and $299 million for the full year.

We expect that we will see higher than normal charge-offs throughout 2009 and into 2010, though not at a level of the fourth quarter 2008.

This expectation drives the significant build in our allowance for future loan losses, specifically the allowance of 12/31/2008 was $424 million or 3.89% of commercial lending assets.

This compares to a loan loss reserve of 1.48% at September 30th.

Both our quarterly charge-offs and our allowance at 12/31 are slightly higher than we previewed a few weeks ago with adjustments due to refinements as we completed our year end review process.

Clearly this is a substantial build in our reserves, but we felt it was prudent to get in front of the deterioration now that we expect -- rather than expect to play catch up in the future.

To be clear, we certainly expect to have additional provisions for loan loss in 2009, but our expectation is that it will be at lower levels than what we saw this quarter.

In addition to credit, below the line other income and expense, was the other major item impacting the results this quarter and we had previewed that as well.

As laid out in detail in the release, other income swung to a significant loss this quarter due to a variety of factors.

First, we had a $70 million gain on the repurchase and extinguishment of debt last quarter compared to just $4 million this quarter.

Also, we had a $40 million loss on investments this quarter due to writedowns on certain cost based investments and other than temporary impairments.

There was a $30 million mark-to-market loss on our agency MBS in the residential mortgage investment portfolio, due to the widening of mortgage spreads and a $21 million mark-to-market loss on derivatives related to swaps that we used to hedge interest rate risk in our commercial loan book.

The loss was primarily due to the significant drop in short-term interest rates that occurred during the quarter.

Additionally we had a $24 million loss that we had previously disclosed due to an exchange of convertible debt for common shares that occurred in October.

Finally, in aggregate of $32 million in losses due to other items such as writeoff writedowns in the value of REO and net foreign currency losses.

Obviously a number of things broke against us this quarter in other income, but let me make a couple of important points about other income going forward.

First, it has been historically a source of much volatility in our GAAP results.

As we have discussed before, with our revocation of our REIT election and the simplification of our business as we transform to a bank, we believe that volatility from other income should be less going forward.

Second, some of the other income items this quarter were unusual in nature or one-time.

Third, we expect that some of the losses that we saw in the fourth quarter will actually reverse somewhat in the first quarter.

For example, the loss in the residential mortgage investment portfolio will be a $14 million gain in the first quarter, as we have now completely sold the agency MBS in this portfolio.

Furthermore, that line item simply will not exist in future quarters.

Also, we would expect much lower derivative losses related to interest rate swaps going forward.

The loss this quarter was due to the significant drop in short-term rates during the fourth quarter, and we are now in a very low interest rate environment.

LIBOR practically speaking can not go much lower.

So far this quarter, LIBOR and swap spreads have been stable.

And therefore, we expect derivative gains and losses also to be stable and in fact, we could see a reversal to a gain if short-term rates and forward swap rates start to rise.

With those comments made, let me turn the call back to John.

Thanks, Tom.

Looking ahead at 2009 and beyond, let's review how we think about the business.

I will start high level and then drill deeper.

As you may have heard -- as many of you may have heard me say before, CapitalSource is in many respects a tale of two companies.

Right now, we have distinctly different issues confronting our bank and nonbank entities.

Accordingly, we have a two-pronged play offense and play defense strategy to address each appropriately.

Our play offense strategy centers around our bank.

We have married our national middle market origination platform to a large stable depository funding platform which positions us to capture attractive lending opportunities in a market with little liquidity.

Our play defense strategy for the nonbank entities, which we will spend most of our time on this morning, centers around our efforts to simplify the business and solve the issues stemming from the breakdown of the capital markets and the massive balance sheet deleveraging which is affecting the economy and financial firms in particular.

2009 is a transition year for us.

We have revoked our REIT election.

We have as of this week completed the unwinding of the agency MBS portion of the residential mortgage investment portfolio.

And we're transitioning to a bank.

This transaction will take time to complete.

Outside of CapitalSource Bank, we're managing our legacy portfolio to minimize credit losses, and working to revise and extend our existing credit facilities for that portion of the legacy portfolio that is not match funded.

As I said at the start of the call, we do belief there is significant value in our business, certainly more value than the market currently is giving us credit for.

From a value perspective, we view the business as having four component parts.

First, we have CapitalSource Bank and the commercial lending asset platform that is married with it.

We believe this business is very well-positioned because it is a clean and well capitalized bank paired with a first rate asset platform.

At year end, the CapitalSource Bank balance sheet showed $6 billion in assets, including $1.9 billion of cash and liquid marketable securities.

The Bank holds the quote a participation interest which is a highly secure investment in paying down rapidly to provide even more liquidity.

And the Bank has approximately 2.7 billion of our loan portfolio.

It is a clean portfolio with currently no delinquencies or nonaccruals, but a good measure of reserves based on our macro view of the economy.

The Bank has $5 billion of deposits, but a branch network we believe can support twice the amount of deposits without the need to add a single branch.

Most of our 63,000 customers have been purchasing CDs in our branches for three years or more, so we also view our deposits as sticky.

We have access to other sources of funding as well, including FHLB advances, but we currently don't forecast the need to access them due to the already strong liquidity in deposit franchise to the Bank.

From a value perspective, CapitalSource Bank has a $916 million book value.

We believe this is a great and highly desirable asset that one day when markets return will be worth some multiple of book; and today at a minimum is worth book.

Second, we have our healthcare net lease business which we also call CapitalSource Healthcare REIT.

With our revocation of our REIT status at CapitalSource in December, we took steps to preserve the REIT status of this business, as it is comparable to other publicly traded healthcare REITs.

In our healthcare REIT business, we own approximately $1 billion of healthcare sale leasebacked assets with only $330 million of property specific debt.

The sale leaseback assets are long-term financings to well managed and strong cash flow in nursing homes.

We view these as highly defensive investments and they are a very attractive place to be investing in today's environment.

We believe that our book value and our healthcare REIT business is certainly worth that number, if not more based on a market comparable analysis.

The third value component we have is $4.6 billion of our commercial loans that are permanently match funded in commercial loan term securitizations with $3.6 billion of debt.

We essentially own a 29% residual interest in this pool of loans.

There are six securitizations outstandings that make up the pool.

They fall into two broad categories.

Four high leverage securitizations were $3.3 billion of loans sit against $3 billion of debt.

Our residual investment is approximately $350 million or approximately 11% of the assets which caps our economic losses.

One of these securitizations are 2006-A securitization where we have $1.2 billion of assets and approximately $1 billion of term debt has a replenishment feature that has in the past been a source of funding to us.

That is, as existing assets in the securitizations repay, we have been able to pledge new assets from our nonbank portfolio into that pool.

The replenishment period is still open, so we may have opportunities in 2009 to put a little more in.

In addition to replenishment, the deal is structured with a $200 million liquidity tranche to fund unfunded commitments as needed in the future.

There is currently $94 million of available liquidity capacity remaining.

The remaining two securitizations, low leverage securitizations if you will, have approximately $1.2 billion of loans with approximately $560 million of equity in them.

We will include a detailed listing of the debt and equity in each of these securitizations as of 12/31/08 in our upcoming 10-K.

The important point to stress is that those securitizations are match funded and nonrecourse to CapitalSource.

They have generally performed within our expectations that we currently have funded certain delinquent reserve accounts as required.

At present, three securitizations have funded delinquency reserves totaling $60 million.

Finally, there is everything else, the fourth component of the business.

Here we own $2.3 billion of loans or approximately 24% of our total commercial portfolio, $165 million of equity investments including $92 million of REO and our residual interest of approximately $70 million in our owner trust portfolio.

When you add it all up, we have $916 million of equity in the Bank, approximately $650 million of equity and related party debt in CS Healthcare REIT, $910 million of equity in the securitizations, and $1.2 billion of equity in the parent company loans pledged to credit facilities.

That is how we think about the value of the business.

In terms of funding risk, we view three of the four components, namely the Bank, the healthcare REIT business and the term securitizations as having no funding risks.

Also, if you look at our principle asset, our commercial loan portfolio, 28% is in the Bank, and 48% is in match funded commercial loan term securitizations, leaving only 24% that is not match funded.

So the only funding risk exists at the parent in that fourth component.

Here the funding is our credit facilities and subordinate debt funding.

Let me turn the calling back to Tom to go over this part of the portfolio, these credit facilities in detail.

Thanks, John.

First let me start with an overview of the credit facilities including the general terms and covenants in those facilities.

In particular, I will talk about the amendment that we completed this week with respect to our principle facility.

And I will also layout our strategy with respect to the credit facilities and then discuss liquidity.

We have currently six credit facilities which we divided to two groups; the syndicated credit facility which is recoursed debt to CapitalSource and then five structured credit facilities which are nonrecoursed to CapitalSource.

The structured facilities have names lick CS Funding 3, CS Europe, and CSE Cure Funding 1.

In the 10-K, we will have a table similar to the tables we've had in prior filings, listing the various facilities by name and basic information about them.

However, let me give you other pertinent facts.

First, the reason we have so many credit facilities is historical.

When we were a REIT, we needed separate facilities for the REIT and for our taxable REIT subsidiary.

Also, we have relationships with multiple lenders and oftentimes, they prefer to have a direct relationship with us through a single by lateral credit facility.

Second, each of these credit facilities is a secured credit facility with a specific collateral package.

In essence, and in legal terms, the five structured credit facilities have many of the characteristics of securitizations secured by commercial loans.

We own the residual in those credit facility securitizations, just like we do in the term securitizations John discussed earlier.

However, a key distinction is that these credit facilities have a much shorter duration and are not therefore, match funding alone.

The syndicated credit facility is different.

It is traditional corporate debt and is recourse to us.

It is senior secured debt of CapitalSource.

The collateral package for each of the structured facilities is just their specific loan pool.

The collateral package for the syndicated facility is loans, that is loans not pledged to the structured facilities, as well as other assets including a pledge of the Bank stock, healthcare REIT stock and other assets.

At 12/31, the six facilities collectively had principle outstanding of $1.4 billion; and this breaks down to $972 million on the syndicated facility and $473 million on the structured facilities.

The structured facility balances range from $16 million at the small end to $166 million and $176 million for the two largest.

The loan collateral securing the structured facilities totaled $950 million, giving them an average advance rate of about 50%.

The syndicated facilities are secured by $1.6 billion of loans, giving the banks an average advance rate of 64% on the loans.

The banks are also secured by other assets as I mentioned a moment ago, making the total collateral package for the syndicated facility over $4 billion.

In the aggregate, this amounts to a collateral to debt ratio of over 4.2 times.

At December 31st, our credit facilities had a total committed capacity of $2.6 billion, giving us undrawn capacity of approximately $1.2 billion.

All but $10 million -- excuse me, all but $100 million of that undrawn capacity was in the structured facilities, which would require the pledge of additional loan collateral in order to fully draw it.

Given our strategy to originate all new loans at CapitalSource Bank, this was more unused capacity than we need.

Therefore, subsequent to year end, we amended three of the structured facilities and reduced their commitment -- their capacity, such that the total commitment committed capacity as of today is $1.8 billion or about $330 million of undrawn capacity.

Included in this $1.8 billion is the fact that we also met the required stepdown payments on the syndicated facility early to bring that commitment down from $1.70 to $995 million currently.

Collectively, these reductions in excess unused commitment will save us approximately $3 million in unused line fees on an annualized basis.

Clearly the lenders in these facilities are very well collateralized.

Some of these facilities have maturities beginning this spring.

Some of those have additional one-year amortization periods.

However, all of these facilities reach their final maturities or end of the amortization periods across the next 13 to 14 months.

We're in negotiations to renew the three structured facilities that is mature in March and April.

However, our broader strategy is to address these near term maturities and those facilities with maturity dates that are further out.

We would like to obtain additional duration or term.

And since the historical reasons for having so many individual facilities no longer exist, we would like to see if we can combine some or all of the facilities.

We think that combining the facilities would be in the lender's interest, in the sense that it provides them with a broader and more diverse collateral pool.

We have an excellent working relationship with our bank partners and are confident of our ability to complete negotiations that will provide adequate funding capacity for our needs in 2009.

Quickly accomplishing the most recent amendment, with the support of over 90% of the syndicate banks is a good illustration of why we are confident about the ultimate outcome of those discussions.

Part of the reason we have such good relationship with our banks is because of their significant level of over collateralization.

Another is that they understand well our banking strategy.

And a third reason in my judgment is that they see us through CapitalSource Bank as being a vital provider of loans to small and mid-sized businesses in this difficult economy.

And they understand the important policy implications of providing much needed capital at this critical time.

Turning now to the covenants, we have a financial variety of financial covenants in each of our credit facilities.

I would like to spend a couple minutes reviewing the covenants in the syndicated facility, because it is our largest facility by far and the only one with recourse terms.

The structured facilities have a more limited set of covenants, but their recourse is limited to the specific collateral pool.

The original agreement and various amendments to the syndicated facility have been previously filed with the SEC, but for investor convenience, we will be filing a single composite agreement incorporating the latest amendment as an exhibit to our 10-K.

The syndicated facility agreement is a complex legal document so I will only provide a high level overview of the covenants on the call now.

But generally speaking, I would also like to point out that terms like charge-offs, that have a specific meaning for GAAP, are used also in connection with the syndicated facility but are defined differently for the purposes of the covenants.

Looking at the source material is essential for those who want to fully understand the covenant details.

Briefly, the five principle covenants we track with respect to the syndicated facility and their trigger points are as follows.

We have a tangible net worth covenant where we must maintain a minimum tangible net worth.

This covenant is based on a formula which starts with a certain amount and adds to it equity proceeds raised in various percentages from different points in time.

Boiling it all down, the current covenant level is that we must maintain $2.4 billion, $2.462 billion to be precise of tangible net worth, and we currently have over $2.8 billion.

We also have a maximum leverage covenant, which is a debt to equity ratio, which is defined in such a way that the deposits are actually not included in debt.

The covenant level is six times debt to equity until the first quarter and 3.5 times thereafter.

We're currently at 3.56 times at the end of December.

However, this lower level is okay because we no longer have the agency MBS which is very high leverage, and as defined deposits are not included in the debt calculation.

We have two charge off covenants.

These measure a ratio of charged off loans to an average balance.

There is two tests, one is for the nonbank portfolio, and one is for the entire portfolio.

Here again, we use a defined term that includes GAAP charge offs plus loans with specific reserves, loan that is are more than 180 days delinquent and 50% of insolvent or foreclosed loans that not otherwise included in the test.

The covenant level is 6.5%, a we're currently at 4%.

This is a covenant that we amended and increased the level most recently.

The charge off covenant for the pool, excluding the bank, is similar definition.

The covenant level is 8.5% through the first quarter, going to 10% thereafter, and our actual level at fourth quarter of 2008 is 4.77%.

We have a minimum interest coverage covenant which is measured based on a defined -- a definition of EBITDA, adjusted EBITDA.

This includes our earnings before interest, tax, depreciation, but also adds back the gains and losses on our residential mortgage portfolio, derivative gains and losses, noncash equity compensation and other items.

The covenant level is 1.5 times until the third quarter of 2009, and 1.7 times thereafter.

The fourth quarter compliance was waived of course in connection with the waive.

Finally, we have an available asset test, which is basically to make sure remains sufficient level of collateral for the Bank.

And it's a covenant defined as available assets divided by the amount of debt and we have to maintain a ratio of 1.1 times.

At the fourth quarter, we were at 1.3 times.

As you have seen from our recent filings, we have taken a number of steps lately with respect to our credit facilities.

To put all of these in perspective, in December, we amended the syndicated facility.

This was done in anticipation of the downturn in the economy and the pressure we thought it would bring to our portfolio, and therefore, to our future covenant compliance.

In the amendment, we specifically modified the charge off covenants to give us more room, and in exchange we made the syndicated facility a secured facility and agreed to higher prices.

We knew at the time that we might need additional flexibility on that or other covenants in the future so part of our decision in securing the facility, and I think we were right about this, was that by putting the banks in a good collateral position then, they would be able to be more flexibility with us in the future.

About two weeks ago, we subsequently asked for and received a waiver of the fourth quarter interest coverage covenant.

This was based on the size of our expected provision in the fourth quarter and was a temporary solution.

Due to the nature of that covenant as it then existed, specifically that it was a trailing four-quarter test, we knew then and told the banks that we would need to seek a more permanent solution via an amendment to that certain financial covenant.

Just this week, actually on Wednesday, we received the bank's approval for that amendment.

We have also sought and received waivers with respect to certain financial covenants or other credit facilities as well.

In connection with with all of this, we have assessed the adequacy of the cushion with respect to these amended covenants and believe that the cushions are sufficient for us going forward.

This amendment was done based on these forecasts.

And without going into all the details, the forecasts are based on our view of the economy which happens to be a view that's generally similar to the views articulated last week by the Federal Reserve, suggesting that a recession will last throughout 2009.

The last topic I want to address is liquidity.

First in terms of a framework, it is important to understand we managed liquidity of CapitalSource Bank separately from the rest of CapitalSource.

We call the latter, that is CapitalSource Inc.

and all of the nonbank subsidiaries, the parent companies.

John has already walked through how liquid the Bank currently is, as well as the strength of our branch network.

We assume the Bank will be retaining its earnings for at least the next two-and-a-half years, and we do not forecast any dividends coming to us from the Bank nor do we expect to make any additional capital Investments in the Bank.

At the parent company, our liquidity sources are significantly more constrained now than they have in the past due primarily to the market conditions that exist, the commercial loan securitization markets are not open, and the other capital markets remain in a much disrupted state.

However, it also is also true that our liquidity needs at the parent company are also generally less than they have been historically.

Specifically, our business plan is to not make new loans to parent and that all new loans will be originated at CapitalSource Bank.

Funding the new originations in the portfolio, formally was the largest use of our liquidity at the parent company and no longer exists with respect to new loans.

To be clear, we do have unfunded commitments at the parent company for existing loans in our portfolio, but we do not expect to be funding any new loans at the parent.

Having said all of this, our liquidity at the parent is lower now than it has been in the past due to the deleveraging that has occurred across the markets generally.

How that impacts us is through lower advance rates on our credit facilities which is something that we have seen occur over the last 18 months.

Our current parent company liquidity is approximately $265 million, comprised of unrestricted cash at the parent company and available amount that is we can immediately borrow under our credit facilities.

The Bank's liquidity is closer to $2 billion.

Our liquidity forecast for the parent company indicates that we have sufficient liquidity to conduct our business.

Our forecast is based upon a fundamental assumption that we will be able to renew credit facilities as they mature, as well as other assumptions about expected inflows and outflows.

We intend to generate sufficient liquidity at the parent company to fund our estimated commitments with respect to existing commercial loans, the redemption in March 2009 of the convertible debt totaling approximately $118 million, our stepdown obligations of $300 million by the end of 2009 under the syndicated bank facility and for operating expenses.

Sources of liquidity for the parent that we expect to be able to access include cash flows from operations, including interest and principle repayments on loans and lease payments, new borrowings under our credit facility, replenishments under our 2006-A term debt securitization that John mentioned earlier, long-term HUD financing of direct real estate investments that we are currently pursuing through HUD, other mortgage loans on lease properties, and tax refunds related to our net loss position in 2008, and carry back to prior periods.

We also anticipate generating liquidity via the sale of loans, real estate investments, and REO.

Just to reiterate, our forecast is that we do have sufficient liquidity to conduct the parent company business.

John.

Thanks, Tom.

Following that detailed liquidity discussion, let me review our capital levels at both the bank and parent.

Our capital at the parent company at year end 2008 was $1.9 billion.

Our risk weighted capital at the parent using the required bank methodology was 20.6%.

CapitalSource Bank continues to maintain a strong capital position with a year end risk-based capital ratio of 17.4%, well above the well capitalized threshold.

I would add, since I am about to talk about credit, that the Bank currently has no delinquent loans or no loans on nonaccrual status as well.

Let me turn now to our credit performance in the fourth quarter.

Over the past six months, we've all witnessed dramatic deterioration in the economic environment.

We have attempted to incorporate these circumstances into our expected portfolio performance, in order to properly manage our portfolio in these turbulent times and adequately provide for losses that could materialize as the financial and economic pressures further affect or borrowers.

Historically, our losses have been almost exclusively Company specific problems as we have carefully [under rated] our loans and shied away from or pulled out certain sectors that we felt had weak fundamentals.

Over the past couple of quarters, however, we have seen declines in revenues and EBITDA in companies in certain sectors within our portfolio, and dramatic declines in asset values pushing performing companies in those sectors to work out and struggling companies to liquidation.

In the current environment, we have taken a conservative view of future performance, writing down a number of loans to liquidation value over the past two quarters with a goal of putting a fence around existing problem assets.

We have also built a large pool of reserves to anticipate issues that are imminent problems or could become problem loans in the future.

Our fourth quarter credit charges can be divided into three large blocks.

First, we increased specific reserves by $54 million.

Second, we charged off $184 million of loans.

And finally, we increased our policy reserves or our general reserves by $206 million.

Each element reflects the view that severe economic stress will continue to impact our borrowers throughout 2009.

Regarding our charge-offs and in addition to specific reserves in the fourth quarter, approximately 53% of the $180 million of charge-offs were in our cash flow loans, 40% in structured finance, and 7% in healthcare.

Charge-offs were taken on 34 borrowers from among a total pool of 679 borrowers; and the five largest charge-offs accounted for approximately $75 million.

The healthcare losses were primarily from one loan, a very public bankruptcy of a nursing home operator in Connecticut, who has brought to life mismanagement and misrepresentation by a former owner.

CapitalSource has now been awarded four of those homes by the bankruptcy court and settlement of our claim.

We have new operators running those facilities and will sell them over time.

The cash flow loans written off in the quarter include 20 borrowers, totaling approximately $96.5 million.

The two largest charge-offs represent $29 million combined.

Of the $96 million, 51% of the charge-offs were related to borrowers in the consumer sector, either retailers or consumer services, 19% were related to media borrowers, and 21% were related to manufacturing companies.

The structured finance charge off losses were evenly distributed between the real estate business and the rediscount finance business.

Except for an isolated fraud, the losses were related to the collapse in residential real estate.

Our real estate losses were taken in a combination of residential land and development loans.

Rediscount losses were the fraud and related to mortgage lenders hurt by residential real estate collapse.

Although we have experienced stress in the mortgage rediscount business, the balance of the rediscount book continues to perform very well.

Similar to several loans charged off in the third quarter, about $18 million of fourth quarter charge-offs were older loans from '03 to '05 that have been problems for some time.

We previously had a reasonable expectation of collecting all or some of our initial loan, but the significant economic deterioration in the fourth quarter eliminated or substantially reduced those expectations.

As a result, we added to charge-offs or specific reserves for these older loans.

With regard to incremental specific reserves, that is reserves against specific loans rather than policy reserves, we added approximately $54 million to specific reserves in the quarter.

Our specific reserves at 12/31/08 totaled approximately $87 million.

Our expectation is that specific reserves will move to charge-offs within four quarters.

At then of the quarter, the breakdown on specific reserves was cash flow 62%, structured finance 38% and healthcare less than 1%.

Overall, I would characterize healthcare as performing in line with historical experience, that is very few problems barring this one isolated situation I addressed.

Issues in our corporate finance book are arising mainly when a company's liquidity runs short in this economic environment, and its financial sponsor, its owner, reaches a decision they will not put any additional money in the deal forcing it a distressed sale.

Commercial real estate has now entered a real cyclical downturn which could lead to more write-offs and work outs depending on how much longer the cycle lasts.

With 98% senior position in commercial real estate and continuing average LTVs based on regularly updated appraisals, estimated to be in the 60% to 70% range across our whole book, we believe our experience will be somewhat better than the broader commercial real estate market.

It should be noted, however, that today's environment creates uncertain about the value of any asset.

Finally, we recalibrated our policy reserves for the entire book of existing loans, establishing levels near the the top of the range of our internal methodology.

We also applied similarly conservative discounts to problem loans, resulting in much larger specific reserves.

As a result, we have substantially boosted total reserves to $424 million.

Policy reserves increased to $336 million, up from 1/30 at the end of September.

Of the total allowance, approximately 50% was for cash flow loans, 25% for real estate loans and 25% for asset based loan.

Current reserve levels are well above historic rates, consistent with our negative bias regarding credit outcomes.

As evidence of our effort to anticipate problems, we have always considered nonaccruals to be our primary forward credit statistics, as we have conservatively put loans on nonaccruals that may be current in payments, but warrant concern regarding future repayment.

At 12/31/08, we had nonaccruals of $440 million or 4% of commercial assets, which is 164 basis points higher than the third quarter.

Conversely at 12/31, loans sixty or more delays delinquent were 1.75% of commercial lending assets, which is unchanged from the third quarter.

In addition to anticipating future issues, we believe that the relative difference between the two metrics also enables us to build additional cushion as we collect interest on over half of our nonaccrual loans, but do not take it into income.

Our allowance for loan losses now stands at 222% of delinquent loans and 96% of loans on nonaccrual.

In order to test our reserve assumptions, we have performed a shock analysis on our entire portfolio after reviewing data from past recessionary periods, such as 1981 to 1992 and '90 to '91, and several third party studies such as the S&T LCD survey on projected defaults and recoveries from leveraged loans published this past December.

Our analysis anticipates historic high default rates and severe losses, despite the fact that senior secured loans have historically averaged fairly strong recoveries in the high 80s.

Data we have reviewed suggests, however, that in a worst case scenario recoveries could bottom out in the 50% to 60% range.

The shock analysis of our corporate finance book, for example, assumes 100% default rate on all nonperforming loans.

We have also estimated a default rate on performing loans worse than anything experienced since World War II, resulting in a cumulative default rate in excess of any seen in the past 30 years.

We have then assumed recoveries below their lowest levels in 20 years.

A similar analysis has been applied to our entire commercial real estate and rediscount portfolio, where we have looked at historic cap rates, assumed that those rates widened to historic levels last seen when interest rates exceeded 12% and that any loan with a resulting LTV greater than 90% results in 100% loss of that increment above 90%.

We did not apply this methodology to the healthcare or certain specialty lending businesses.

As we have said on many occasions, we believe our healthcare and specialty lending businesses, like our security finance business, are more resistant to the macroeconomic conditions that are affecting the rest of our parent company portfolio and continue therefore, to expect very modest losses.

Having used these conservative assumptions in our shock analysis, we believe our reserves are adequate for the foreseeable future.

In conclusion, our credit losses reflect a combination of economic stress, borrower issues, and a conservative realistic approach to future recoveries given current market conditions.

I would like to emphasize that our specialty businesses with our defensive structures and deep industry expertise have performed better than the general lending market and we expect that to continue.

I would also emphasize that CapitalSource Bank presently has no delinquent loans and no loans on nonaccrual status.

I have asked Dean to provide a few observations about the fourth quarter, about CapitalSource Bank, and about our view of the business going forward.

As our President and Chief Operating Officer, I thought it would be helpful to add Dean to this and future investor calls.

Dean.

Thanks, John.

The fourth quarter was challenging, but it closed a year of significant accomplishment for CapitalSource as we positioned the Company for long-term success, principally with the formation of CapitalSource Bank.

The opening of CapitalSource Bank in July of 2008 capped a long strategic effort to secure a depository to fund our business separate and distinct from the capital markets.

CapitalSource Bank is now the vehicle for our future growth and profitability.

Beginning with the January 1 revocation of our REIT status, 2009 will be a year in which we intend to dramatically simplify our business and advance our transformation to a bank.

Over the next few years as our legacy book runs off, more and more of our commercial assets will reside in the Bank, more of our loans will be funded with low cost deposits, and our margins and profitability will grow accordingly.

CapitalSource Bank will be at the forefront of what we believe will be a new breed of banks, emerging in response to the current financial and economic crisis.

CapitalSource has a fully built out, high quality asset origination and credit management platform which is now married to a substantial retail branch network that provides access to stable, low cost deposit funding which can expand with our future growth.

Overall, our strategy is to operate with less financial leverage, concentrating on our core middle market lending activities.

The collapse of the capital markets will allow banks to regain their prominence in commercial and industrial lending.

By focusing on the commercial borrower, this new breed of banks, like CapitalSource, can improve credit performance and drive higher returns.

Some banks will not be able to take advantage of this trend because of asset quality issues or capital shortages.

Clean depositories like CapitalSource Bank should enjoy a significant and sustained market opportunity.

CapitalSource will continue to conduct its lending activities across multiple industries and sectors.

And we will continue to favor healthcare because of its defensive and steady characteristics in times of economic stress.

Our credit strategy remains in place.

We will maintain our core focus on senior and asset-based transactions with healthy companies and defensive industries.

As we have said on other occasions, we see ourselves as a reliable source of credit to small and mid--sized companies that currently have few places to turn for capital to buy, build, or grow their businesses.

Looking out over the next three years, we thought it would be helpful to provide certain projections relating to some of the most important and high level drivers of our business.

In 2009, we expect all commercial lending assets which includes loans, loans held for sale, sale leasebacks, related accrued interest, and the A participation interest to average approximately $11.4 billion.

This compares to year end 2008 balance of approximately $11.9 billion.

The decline during 2009 relates primarily to the expected paydown of the A participation interest.

Excluding the A participation interest, we anticipate commercial lending assets will average $10.6 billion in 2009 and sale leasebacks will average $970 million.

We anticipate new originations at CapitalSource Bank of approximately $1.4 billion in 2009.

We anticipate this loan growth will be offset by loan payoffs in our legacy book at the parent and pay offs at the bank, keeping lending assets relatively flat for 2009.

We estimate this year's commercial banking segment interest, fee, and operating lease income will be approximately $925 million to $975 million; and estimate interest expense will be approximately $375 million to $400 million, producing net investment income for the segment of approximately $525 million to $600 million.

We are modeling the forward one-month LIBOR curve averaging 87 basis points for 2009 and rising to 2.75% by 2011.

We anticipate run rate operating expenses, net of depreciation and amortization, to be approximately $60 million per quarter during 2009.

We expect charge-offs for the year which should come from existing reserves to be in the range of $300 million to $400 million and expect a decrease reserves during the year by $125 million to $150 million.

We expect the highest charge offs and specific reserves to come in the first quarter and then decline modestly throughout the year.

The only credit expense that will run through our P&L therefore is $175 million to $250 million that will be added to reserves during the year at charge-offs are incurred.

For 2010 and 2011, we are projecting loan growth in the Bank in excess of $2 billion per year.

We expect overall commercial asset growth will remain modest to relatively flat as new loan production in the Bank will likely be offset by normal loan pay offs.

Net investment income should grow annually at a rate of 10% to 15% during this period, as more of our business is funded with lower cost deposits and our use of higher cost warehouse credit facilities declines.

We will also see a greater exact from loans made at higher spreads since the formation of CapitalSource Bank and we expect to continue to achieve operating efficiencies that will keep operating expenses flat to down from current levels.

In conclusion, we are very well-positioned to prudently grow the Bank in a deliberate and profitable way over the next three years.

Our first six months of operations have been a success, and we have established an excellent working relationship with our regulators.

Though general M&A activity is down throughout the economy, we are seeing excellent opportunities in healthcare, secondary loans and other parts of our business, and are consistently underwriting new loans at high spreads with tight structures in a market with few competitors.

I will turn the call back to John now to conclude before we take questions.

Thanks, Dean.

To sum up our key messages this morning, we have a clear strategy in place to achieve long-term success.

There are some short-term hurdles that will be difficult at times, but we believe entirely manageable.

The business is therefore about execution.

We have strategically done what we can.

We have a bank which is the only future for lending, and we have kept our leverage low which provides us the type of capital levels we need to manage through the cycle.

Our low leverage and strong capital position will cushion us from what is likely to be a prolonged and had very difficult credit and liquidity environment.

We fully expect to come out the other end of this with a valuable commercial lending oriented bank.

In Dean Graham, our President of CapitalSource and Tad Lowrey, the President of CapitalSource Bank, we have two very talented and capable managers well positioned to execute against our plan, despite this difficult environment.

And investors should be confident of their abilities and stewardship.

Dean and Tad are fully engaged in our quote, playoff and strategy, working together to build CapitalSource into a profitable and valuable enterprise.

I will have a higher level of focus throughout 2009 on managing our play defense strategy, which includes managing credit outcomes from our legacy book and managing our financing relationships.

As I said at the outset, we understand the legitimate need of investors to have a new level of detail about public companies, similar to what we have provided today.

We also realize this is not a one-time true up of outstanding information.

We intend therefore, to continue to provide detailed disclosures of relevant information on a quarterly basis, based on investor inquiries.

With that, operator, I think it is time to open it up for questions.

(Operator Instructions).

Our first question comes from Sameer Gokhale of KBW.

Please go ahead.

Thanks.

Good morning.

I had a question firstly on the paydowns of the portfolio.

I think the commentary in the press release said that payoffs were about $95 million in the quarter and I think that's quite a bit lower than has been in the past.

Is that simply because you in situations where you have loans -- historically loans have been taken out in refinancing type situations or M&A, and maybe there is a drop off in activity and that's why you saw the decrease in the loan paydowns?

Some perspective on that would be helpful.

Yes, Sameer, I think our insight is dead on accurate.

This is obviously a much less liquid environment.

I would say historically, the vast majority of our loans prepaid way before their maturity, based on some on some type of transaction that was occurring around them, either recapitalization of their business, the sale of their business, some acquisitions they were doing that caused them to need to redo their debt structure.

With that kind of volume down, there is not really a transaction if you will that drives an early prepayment.

We're expecting that to continue throughout '09.

And then as far as the unrestricted cash at the whole [full co], could you remind me again how much that was at the end of the year and can you reconcile that?

You gave very good commentary about the different aspects of the business and liquidity, but I wanted to get a sense for the reconciliation between cash you have at the parent -- unrestricted cash there versus the decision to issue $61 million of stock it was at $3.15 a share to pay off part of the portable debt.

If you can shed some color on that, that would be helpful.

Sure, Sameer.

I will take the question.

Just so you understand, when we say liquidity, we measure not just the cash and unrestricted cash, but also immediate availability under our credit facilities and those things are very [bunchable].

We can drop the facilities and have more cash or pay them down and have more availability.

So at the end of the year, there was $1.3 billion of cash and cash equivalents.

Most of that being at the Bank, about $1.2 billion of that, so just north of $100 million of cash and cash equivalents at the parent.

As I reported already on the call, our liquidity today is certainly well in excess of that number.

Part of that, as we mentioned, we had sold the agency MBS portfolio and those trades have all now settled.

And there was certainly a return of our haircut capital as well as the gain we had the first quarter to the Company which increased liquidity.

Then the reason for issuing that equity of like $61 million I think was that a function of the fact that you have seen asset paydowns decrease significantly and that decline asset paydowns was greater than what you anticipated?

Because I think in a recent conference, John, you mentioned that there was enough cash, it sounded like to pay off all the maturing on the portable convertible bonds.

I wanted to get some sense for that.

Absolutely.

It was just I would say cushion for us.

We had and do have certainly enough cash to pay down that debt even before the exchange.

But our simple decision was we decided we would rather have $60 million more liquidity then $60 million less.

Okay.

Just one other question.

In terms of the credit losses, you talked about the losses by business segment.

I was curious if we were to look at it another way which is by type of loan, for example, mezzanine loans.

How much of your credit losses were driven by the mezzanine loan portfolio and is that all concentrated pretty much in the corporate finance book?

I don't believe if I am wrong I will follow up with you, but I am fairly certain that none of the credit losses in the quarter were related to mezzanine loans.

Okay.

That's helpful.

There is a chance I am wrong about that and if so I will correct it, but that's my sense.

And Dean is nodding as well, and Tom, so I think we're pretty confident that's the answer.

If it is different, I will get back to you.

Let's put it this way, if there was some, it was very small.

Are you currently still originating mezzanine loans?

No.

We are not.

Mez loans -- we don't view mez loans as bankable assets.

Since the Bank is the source of funding, we're no longer in the mezzanine business.

Not that we were ever a big player in that business to begin with.

It was more I would say opportunistic stuff that we did around the edge.

Going forward, mezzanine loans don't have liens even though there is not specific rules with regulators per se, we think loans without liens are not eligible bank assets.

Okay.

That's great.

Thank you.

Thank you.

Our next question comes from John Hecht of JMP Securities.

Please go ahead.

Good morning.

Thanks for taking my questions.

A couple of questions for near term modeling perspective.

You highlighted some additional cost for deposits going into Q4 that smoothed out into Q1.

Can you give us a sense where deposit costs are going right now?

Yes, sure, John.

I think the deposit cost now are significantly lower.

We dealt with certainly increased local competition if you will in the fourth quarter.

We're currently offering deposits or raising capital at significantly lower levels.

I don't have the weekly pricing in front of me here.

But if the weighted average interest rate in the portfolio is about 3.4%, we're currently raising deposits at considerably less than that.

I want to say it is about 150 to 200 basis points less than that.

Okay.

And can you give us -- can you characterize the yields that you're bringing on in terms of new originations at the Bank?

Sure.

John, this is John.

We're not really looking at opportunities in terms of new direct originations, unless they have underwritten yields in today's environment of LIBOR 700 to 800.

Typically with some floor on line LIBOR.

And then, John, if I could ask you, how are your sponsors that you work with historically, how are they responding when borrowers get into financial stress?

Are you able to reach out to them and get them to recap the Company with more equity?

What's the character of the discussions in that regard?

I would say that one of the reasons that we have seen an uptick in credit charges is because sponsors are less willing to do that than they have in the past.

Sponsors live in the real world as well and they see what's going on.

If they have -- in the past if there was a company that had experienced some operating difficulty and had a liquidity issue, I would say prior to last six to nine months, nine out of ten of those situations would go toward some type of restructuring of the debt whereby sponsors would put in capital to provide liquidity to the business and may or may not have a paydown of our debt associated with it.

And would typically involve us easing up on amortization payments, would be the typical workout 101.

They put in money to provide the business with liquidity.

We ease up on the amortization, so that their money isn't going directly pay us down, but it gives the business liquidity to work through whatever the problem was.

That was typically what happened in most situations.

In many of those situations, then it typically worked out where the additional liquidity allowed the Company to get through whatever problem they had which might have been some execution issue they ran into, et cetera.

I would say in this environment, sponsors are obviously much less inclined to do that for a whole variety of reason,s ranging from -- we think in general there is a bias that sponsors not to draw down capital.

Even though they have committed funds, their investors don't want them to draw the money down.

There is that kind of general bias across the private equity industry.

But secondly, I think they obviously are very cautious about the environment, and are very concerned about putting additional money in companies that is are having issues.

What happens there is -- it has been our experience at CapitalSource that if we end up actually putting money into try to fix the business, it generally -- the outcomes haven't been as good as we would have liked.

What we're really doing in this environment -- if the sponsor is not willing to put money in, we then just proceed to liquidate the company.

And there is a higher percentage of that occurring than there has been in the past.

On that latter point, when you go into liquidation, and I assume this has impacted where you're coming out of your general reserve assumptions.

What type of recoveries are you getting in a senior secured situation?

I think it varies.

What we have been able to do in certain situations is actually -- when a sponsor is not willing to put money in, prior to us going to liquidation and workout, we sell the loan.

We sell the loan to someone who really wants to take over the business at a lower price.

We have generally seen bids at $0.40, $0.50 on the dollar.

Okay.

Then we avoid -- then the loan is owned by someone who wants to own the business and they use the loan as a way of owning the business.

Okay.

Thanks very much for the color on that.

Last question is for Tom.

On the covenants with the recourse facility, the charge off covenants.

Are those rolling fourth quarter charge-off covenants or are they one quarter limits?

They used to be rolling fourth quarter and now the new formulation of it which gives us considerably more room is a quarterly test.

Okay.

Thanks very much, guys.

Thank you, John.

Our next question comes from Bob Napoli of Piper Jaffray.

Thank you.

Good morning.

Lots of great additional information.

I was wondering if Dean could reread the guidance?

Just kidding.

We'll go through the transcript.

Yes.

The question first of all on the dividend, are you intending to keep the dividend?

It is about $60 million in cash.

Do you have any thoughts about spending the dividend until the economy improves?

We're not declaring our dividend at this point.

I think our view is we will probably pay some dividend this year, but I would anticipate it being lower than what we paid in the fourth quarter.

Okay.

And just make sure I understood that the guidance that Dean was giving was for the overall company, right?

Yes.

What I thought I heard is you expect your loan -- commercial loan balances to be generally flat through the year with growth at the Bank offsetting runoff at the --in the nonbank?

Remember, there is run off at the I-Star loan, is a very meaningful part of the run off.

That is the real driver of why loan growth is largely flat.

You would have positive loan growth this year excluding -- if you back out the I-Star.

Commercial lending assets, you're expecting to have modest growth in '09, with obviously growth in the Bank and offset by shrinkage in the nonbank.

Is that clear?

Yes.

Loans would be -- if I start in -- if you back the I-Star out and did a net number, then average loans would be up.

Okay.

Incremental margins, then on your loans versus the current margin?

The A participation is a negative margin business right now.

Okay.

To the extent we -- because that A participation is LIBOR plus 150 and has no LIBOR floor.

That's a very low yielding investment.

That creates really a negative margin relative to our cost of funds.

Clearly if we replace the A participation with other loans, you will see a very dramatic increase in margin.

Yes.

Okay.

Tom, the covenants or the credit facilities that you had gone over some key credit facilities you need to have renewed over the next several months.

Can you go through that one more time?

Sure.

We have a couple of facilities that are coming due in -- let me start with the syndicated facility which I spend a lot of time talking about.

That's due March of 2010.

We have a -- one of the credit facilities which has -- one of the structured facilities which has $176 million drawn on it, which is has a maturity date of March 2010.

That also has an amortization period, excuse me, maturity of March 2009, has an amortization period for up to a full year.

Effectively March 2010 on that.

We have another credit facility with $74 million.

That's drawn and has maturity date in April of 2009.

We have a credit facility with $16 million drawn, that's got a maturity date of April 2009 but a one-year extension period.

Those three that we were talking about specifically.

In which you have about $260 million drawn against those three?

Correct.

Most of that obviously, is in facilities that is have a one-year amortization period.

Your hope is to renew each of those facilities?

Yes.

I would say my expectation is that we will renew those facilities.

Okay.

The healthcare REIT, how much -- you had gone through, John, the equity capital within the healthcare REIT?

Yes.

What is that?

The healthcare REIT, our investment in the assets is $1billion.

And it has $330 million of property specific debt.

Okay.

In this market and I am not looking at the healthcare REITs that held up better than most of the market's in healthcare asset as a better asset.

Can you sell any of those assets at book value or is there no real margin?

We think we can.

We think we can.

That sector has generally held up very well.

It didn't hold up for the one or two weeks we tried to do an IPO of it.

Then it remarkably recovered as soon as we pulled our deal.

I think that market -- there is obviously very good fundamentals there.

Our healthcare REIT focuses in particular on nursing homes which we think is the best place to be.

We think healthcare REITs that have more of an orientation towards assisted living and independent leaving will come under pressure.

But the nursing home REITs will actually do better.

I can get into why we think that if you'd like.

We think our orientation is a very defensive and a solid portfolio.

The cash flows are strong.

The coverage is good.

There is financing available for these type of assets through the HUD programs.

That if anything, are getting more liquidity.

And these assets are eligible for that, either for us as a borrower or for people who want to buy our assets who get the HUD mortgage to buy them.

We think that that's a very solid asset.

Listen, it is a very solid asset of the Company.

It's a very valuable asset of the Company.

It produced a lot of cash flow.

But it's also an asset that we can access liquidity against, we believe.

Why would you not have sold some of those assets instead of converting -- having to convert?

It is pretty diluted.

There is timing implications to all of these things.

HUD mortgage takes three or four months at best to get done.

On the convert side, is there any thoughts about having additional converts -- allowing additional converts to trade into common as opposed to paying them off?

No.

There is no other converts due until 2011, and then 2012 after that.

Okay.

If I understood, Dean, on the allowance and charge-off, the way you expect the allowance ratio to trend through the year, you've got -- the reserves, you expect that reserve ratio to decline gradually through the year, the reserve dollars and percentage.

Is that right?

Yes.

That's right, Bob.

What is your feeling with the reserves that you take -- that you took in the fourth quarter to being able to generate profitability in 2009?

Let me just say a couple of things, Bob.

Number one, of the reserve that we posted, only $83 million of it is, I believe allocated to specific loans.

The rest is our policy provision or general provision.

We do believe there is more loss inherent in the portfolio, but it certainly hasn't been specifically identified.

We feel good about where we are with the reserves.

I think the single biggest challenge to profitability from a GAAP perspective, certainly in the first quarter, would be the exchange transaction we did do and disclosed the other week which was result in a $68 million --

Right, but excluding that.

Excluding that, I think we will certainly be profitable this year.

If you go through the math on the guidance Dean gave, it will indicate the business will be profitable.

Okay.

And last question.

The deferred tax asset, I would imagine then if you're generating profitability in '09, then we would then see that deferred tax asset reverse?

Yes.

Obviously, it depends on the level of taxable income.

Also since you made that point, that's one of the benefits of the dereading if you will, that we could reload the balance sheet with deferred tax assets from the REIT.

Thank you.

Thank you.

(Operator Instructions).

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

Please go ahead.

Good morning, and thanks for additional details.

It is very helpful.

Just two quick housekeeping questions.

One, I know the Bank itself is a bank charter now.

Any stat us in the bank holding company for the parent?

I believe you did apply for TARP and curious if there is update on that?

The bank holding company application, I would describe is in process which we think is reasonable.

We did not receive expedited treatment for application.

I would describe us as in the normal queue which is generally pretty lengthy, six to nine months.

That's where we are with the bank holding company.

As far as TARP is concerned, obviously TARP wouldn't be a consideration for the Company unless we were a bank holding company which i not likely to happen for awhile.

It is our view that it is a low probability.

The Bank is eligible for TARP, but it is our sense the Bank based on it's capital levels doesn't need any capital.

That's how the TARP analysis plays out.

Okay.

Thanks.

On [Towff], the ABS program that the Fed is setting up, they're making an allocation for CMBS.

I wonder if you thought maybe about -- is it possible, would it make sense to maybe participate in that on a CMBS side?

Maybe refinance some commercial real estate?

I would say we're looking at that, tracking that.

But I think a lot more details need to be forthcoming before we could have a view.

Okay.

And then final question, on the unfunded commitments you have.

What would be the maximum exposure if every borrower drew down the commitment?

And then to mitigate that, are you taking any action?

The total unfunded commitments across the entire portfolio is about just north of $3.5 billion.

Some portion of that it in the Bank and some is out.

We do a lot of analysis around that and now that we're no longer funding new loans, that's the single biggest thing we think about with respect to liquidity at the parent.

We believe with respect to our expectations about how that portfolio is going to fund, and you have to remember, a lot of these things are discretionary.

There may be a commitment outstanding, but just like we would have to pledge loans to our credit facilities, they would have to pledge collateral to us.

They simply don't have it, so we think it is a manageable number.

We do a loan-by-loan analysis on that to come up with our forecast of what's going to borrow under those things.

It counts that a lot of them fall under the category of discretion.

A lot fall under the category of collateral dependent.

A lot fall into the categories where there is default with the borrower and there's no ability to draw the commitment.

It is a lot of loan-by-loan analysis.

To your point earlier about the portion that's at the holding company -- the Bank has plenty of liquidity.

Curious as to how much that far might be at the holding company?

Right.

I think also an important point is with respect to the loans there are in the Bank, that there also may be a balance at the parent.

The first obligation to fund it is at the Bank.

The larger portion of it is certainly at the parent, but again the amount of it that we expect to fund is much smaller.

Also with respect to our secured facilities, to the extent we are or would fund a loan, that is new collateral that we can pledge those facilities.

It is not like we necessarily have to come out of the pocket dollar for dollar for those fundings.

As I did mention, we did step down what we believe to be excess commitments in those facilities.

That's part based on our view those things are not going to be funded.

Thanks very much.

Our last question is a follow-up question from Bob Napoli of Piper Jaffray.

A simple question.

Of the loans you have outstanding, what is the dollar amount of healthcare?

You mixed in healthcare with specialty.

How much do you -- of the growth, what percentage of your portfolio -- do you have a any broad perspective of what percentage healthcare will become of the portfolio?

I think our healthcare assets are about -- probably bigger the number -- bout $2.5 billion.

Okay.

$2.8 billion, I think actually.

To be specific, there is about $330 million in healthcare ABL, about $1.2 billion in healthcare real estate, and then about $1billion as you mentioned already on --

And about $400 million of healthcare cash flow.

Correct.

$2.7 million, $2.8 million, Bob.

And of the additional loans that you're making, what -- can you give a feel for the mix of loans that you're adding by sector?

Very rough?

I would say that the healthcare business is about half of what we're doing at this point.

Okay.

That's it.

Thanks.

One other thing since I have an open line here.

Sameer asked a question earlier about a mezzanine loan and the charge-offs.

There was about $60 million of charge-offs related to mezzanine or subordinate loans in the charge off number.

I will use this as an opportunity to answer that question more specifically.

Thank you very much.

Operator, that concludes our call for today.

Thank you.

The conference has now concluded.

You may disconnect your lines.