PacWest Bancorp (PACW) 2009 Q1 法說會逐字稿

Hello, and welcome to the CapitalSource First Quarter 2009 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 Mr.

Dennis Oakes, Vice President of Investor Relations.

Mr.

Oakes, you may begin.

Thank you.

Good morning, everyone, and thank you for joining the CapitalSource First Quarter Results and Company Update Call.

Joining me this morning are John Delaney, our Chairman and CEO; Dean Graham, our President and Chief Operating Officer; Don Cole, our Chief Financial Officer; and Tad Lowrey, President and CEO of CapitalSource Bank.

This call is being broadcast live on our website, and a recording will be available beginning at 12 noon today.

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

We have also posted some slides on our website that provide additional detail on certain topics, which will be referred to during our prepared remarks, and those slides are up on the site now.

Investors are urged to read the forward-looking statements language in our earnings release but essentially it says that 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 and outlook involved 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, and CapitalSource is under no obligation to update or alter our forward-looking statements, whether it's 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.

John Delaney is up first this morning.

John.

Thank you, Dennis, and good morning, everyone.

As I described on our fourth quarter earnings call in February, we have a two-pronged strategy with play offense and play defense components to manage our business through these challenging economic times.

Our results this quarter are largely as we expected and represent progress on both fronts.

Since the first of the year, we have met our liquidity needs including redemption of $180 million in convertible debt while maintaining adequate cash levels and taking steps to supplement normal quarterly cash generation; reduced the levels of charge-offs by roughly one-third compared to the fourth quarter while keeping our reserves at a prudent level equal to roughly 4.3% of total commercial lending assets and 5.9% of parent company loans; revoked our corporate reach status and sold the agency RMBS portion of our related compliance portfolio; initiated the process of renewing our credit facilities and extending their durations to better match the scheduled maturities of the underlying loans; funded $200 million of new loans at CapitalSource Bank prior to March 31 with an average spread of 780 basis points over one-month LIBOR including coupon interest and fees; produced first quarter net investment income of $150 million despite a significant decline in one-month LIBOR, which is the benchmark for most of our borrowing and lending outside of deposits.

That decline had a reduced impact on interest income as nearly 50% of our loans had in the money interest rate floors.

We had a breakeven quarter at CapitalSource Bank despite a $25 million increase in loan loss provisions.

I will spend time this morning providing a detailed look at credit performance, and update on renewals of our bank lines, and a review of sources and uses of cash in the quarter.

Next, Dean Graham will share the results of our own portfolio stress testing using the Treasury Department guidance, and he will review the commentary we provided in February.

Our new CFO, Don Cole, will review the numbers and key earnings drivers in the quarter, provide new disclosure about the characteristics of loans and our securitizations and credit facilities so investors can better value those assets, and he will explain the new reporting segments established to best reflect our current operating structure.

Tad Lowrey will then speak about results of CapitalSource Bank, and I will conclude with an updated view of the four components of our business as we continue to believe the market does not fully appreciate the true value of the CapitalSource enterprise.

Aggressively managing our credit book is the top priority of our play defense strategy with the necessary caveat that one quarter does not constitute a trend, we did see some modestly encouraging signs in the first quarter including a substantial decline in charge-offs from $184 million in the fourth quarter to $124 million in the first quarter and a dramatic decline in incremental provisions for loan losses from $445 million in fourth quarter to $155 million this quarter.

We are maintaining a conservative view of future performance, however, and have written a number of loans down to liquidation value over the past three quarters.

We saw significant increases this quarter in our accruals, delinquencies and impaired loans, which is why, among other reasons, we continue to maintain a cautious outlook on credit.

Though of concern, the increases were not surprising importantly because we are now seeing more asset-based loans and real estate loans migrate into these categories, recovery should be much higher than recoveries for cash flow loans not secured by hard assets.

Additionally, we saw a significant decline in 30 to 89-day delinquencies from 2.75% of commercial lending assets at December 31 to 1.21% at March 31.

At a 20,000-foot level, we observed the following trends -- stabilization in the number of non-performing loans associated with our cash flow financing, which accounted for 47% of charge-offs in the quarter compared to 53% in the prior quarter.

A clear bifurcation has emerged between the portion of our re-discount or lender-financed business associated with residential mortgage finance with eight of our loans in that portion of the portfolio now in the impaired category while the balance of the re-discount business continues to perform very well.

The residential mortgage category accounts for about $250 million of loans against which we have already taken credit charges including specific and general reserves of $30.9 million.

The remainder of the re-discount book is $1.75 billion, and at quarter-end there were less than 1% delinquencies there.

Many observers have wondered how long commercial real estate could hold up as residential real estate was deteriorating.

In the first quarter, softness in the commercial real estate market became more pronounced due to the current recessionary pressures and a dearth of available financing in the industry.

We recognized $29 million of charge-offs from commercial real estate in the quarter, and also had REO losses of $16.1 million.

Our policy reserve level for the non-health care commercial real estate loans in our legacy book is 5.8%.

So we have already set aside that level of reserves for the entire non-bank CRE portfolio.

We also expect our commercial real estate losses to be mitigated by the fact that we underwrote them based on loan-to-cost not loan-to-value, which provides for greater alignment with our clients and less cap rate dependency, which we believe will lead to relatively greater recoveries.

Our commercial mortgage loans were designed to be intermediate bridge loans, typically two to three years, until the underlying properties were rehabilitated or otherwise stabilized, sold and/or refinanced.

But takeout options are obviously limited in today's market.

Until such time as permanent financing once again becomes reasonably available, we expect to extend performing real estate loans by an average of 18 to 24 months with sponsors contributing cash, additional collateral, and other structural enhancements on top of higher pricings.

To be clear, we view the lack of financing available in the commercial real estate industry and the corresponding decline in asset values with real concern, and the situation should not be sugar-coated.

We, like others, are estimating the levels and timing of stabilization for this asset class, and our comments should be viewed with that caveat in mind.

Diving a bit deeper on the commercial real estate portfolio is instructive.

Our total current book of 86 loans totals approximately $1.8 billion in commercial real estate with $287 million on non-accrual.

We currently have specific reserves on the commercial real estate book of $29 million on top of the 5.8% policy reserves on an entire portfolio I mentioned a moment ago.

About 50% of the portfolio is either in non-recourse securitizations or non-recourse credit facilities; 34% is in CapitalSource Bank; and 16% pledged to our syndicated credit facilities.

We have only one significant geographic concentration -- Manhattan -- which represents about 25% of our commercial real estate loans by dollar amount, 91% of those are performing.

Finally, as has been the case since CapitalSource was founded, our health care real estate and health care credit businesses had virtually no losses in the quarter.

Only one loan accounted for $1.6 million of charge-offs.

There are no loans in our security business on non-accrual, and no charge-offs associated with that business, which is approximately $485 million.

As I mentioned on the fourth quarter 2008 earnings call, our actions in recent quarters to boost reserves both specific and policy reserves were designed to identify and ring fence our problem assets, which are principally in our legacy loan portfolio.

The significant decline in charge-offs and reserves this quarter are early indicators that we are making progress to that goal.

In the quarter, we added a net $8 million to specific reserves and $13 million to our policy reserves.

The $124 million charged off in the quarter was a decline of about one-third from the fourth quarter level, but it is too early to be certain this is indicative of a downward trend in charge-offs.

Forty-one loans were charged off in the quarter from a total pool of 1,055, and the five largest charge-offs accounted for 34% of the total.

Approximately 47% of charged-offs were for cash flow loans; 23% for commercial real estate; 27% for re-discount; and 1% for health care.

The cash flow loans written off in the quarter included 21 loans totaling approximately $58.5 million.

The two largest charge-offs totaled $17.5 million, the two largest commercial real estate charge-offs totaled $12 million, the re-discount losses were $32.4 million and were related to mortgage lenders impacted by the ongoing deterioration of residential real estate.

About 40% of charge-offs in the quarter were loans made between 2003 and 2005, and about 60% were made between 2006 and 2007.

We expect the pattern we saw this quarter to extend for at least the next couple of quarters.

That is a continued deterioration of commercial real estate with a level of relative stability in the rest of our book.

We continue to believe that our senior position in 98% of our commercial real estate loans and still relatively manageable LPVs across our entire portfolio will result in a performance that will be somewhat better than the broader commercial real estate market.

Turning now to a second principal of our play defense strategy, we are very focused on making substantial progress towards our goal of matched funding as closely as possible, substantially all of the assets in our commercial loan portfolio.

At quarter-end, approximately 45% of our $9.3 billion of commercial loans were funded in six non-recourse securitizations; 31% were in CapitalSource Bank and funded with deposits, which effectively provide permanent financing; and the remaining 24% were pledged to bank credit facilities.

About two weeks ago, we announced that the first of our six credit facilities had been renewed with a three-year term and the capacity to draw an additional $50 million to fund unfunded commitments.

We are working with our lenders to extend the duration of our other facilities including CS Funding III, which had an outstanding principal balance of $81 million at March 31; QRS Funding I, which had an outstanding balance of $15 million; and CS Europe, which had an outstanding balance of $159 million.

We hope to have those discussions concluded within the next several weeks.

By extending the term of these facilities to more closely match the duration of their assets, we intend to eliminate short-term liquidity needs relating to these facilities.

Briefly overviewing our sources and uses of cash, particularly in the second quarter, our available cash today is $175 million outside the substantial cash in CapitalSource Bank after paying down $25 million earlier this week on the syndicated bank facility.

During the second quarter, we expect to have fairly limited cash uses outside of the bank.

We have reduced the commitment amount on our syndicated facility from $1.07 billion to $970 million, and we will make an additional $70 million stepdown in commitment by June 30th.

We also plan to fund any unfunded commitments drawn by our borrowers.

Our expected sources in the second quarter include initial proceeds from HUD financing of certain of our net leased properties.

We have applied for approximately $93 million of HUD financings and are in the process of applying for an additional $25 million.

We will receive proceeds as mortgages close on each individual property -- the initial phase, which we expect to begin in June.

We also continue to look at other methods for further monetizing the net lease assets including sales.

Also, any REO or loan sales and loan payoffs will provide further liquidity in the quarter.

In addition to reviewing our performance in the quarter, we thought it would be useful today to address two key questions we believe an increasing number of investors view s critical considerations when making a decision about owning a bank or financial institution.

The first question is -- does the institution have enough capital to withstand a stress scenario?

Answering that question requires an examination of starting capital levels and pre-provision profits that buffer additional provisions.

The second question is -- how strong will the institution's pre-provision profits be when the current recession is behind us?

Put another way, when all losses inherent in the system today are ultimately realized, which they will be, does the entity have a valuable and strong earnings stream?

The most telling indicator to answer that question is the net interest margin at present, and the potential for the institution to grow its margins over the next several years in today's very attractive lending market.

As Dean will explain to you in more detail now, we believe we have both sufficient capital to weather this storm and meaningful pre-provision profit today to cushion further loan losses.

In addition, we expect to be able to grow capital over the next three years as well as expand profitability as we deploy the excess liquidity at CapitalSource Bank into high-margin loans and investment opportunities while at the same time reducing our funding costs.

So, with that, I'll turn it over to Dean.

Thanks, John.

As we indicated on our February call, we performed a shock analysis on our entire portfolio at year-end 2008.

In order to inform our reserving and to realistically assess how bad things might get, we examined past recessionary periods and applied that experience to current economic conditions.

More recently, we asked an independent third party to conduct an additional analysis mirroring the stress tests performed by the Federal Reserve on major US banks.

The institution we retained was actually one of the 19 banks examined, so they had access to the details of the government tests adopting the approach the federal government used regarding credit performance including application of the Treasury downside scenario, which is harsher than the current economic consensus.

They stressed our entire portfolio.

The assumptions were applied to all loans originated before CapitalSource Bank opened in the third quarter of 2008 based on balances and net charge-offs at March 31, 2009.

Applying these assumptions, CapitalSource would pass the test of maintaining capital levels at the end of 2010 that are roughly equal to current tangible common equity levels of $2.6 billion.

In fact, our internal projections suggest book equity could be meaningfully higher in three years at the end of 2011 even under an elevated stress scenario.

Our pre-provision income in the first quarter was $150 million.

As our CapitalSource Bank President, Tad Lowrey, will describe, we continue to see excellent opportunities to deploy the liquidity we have at the bank at very attractive spreads.

The low-yielding A participation interest and excess cash on the bank balance sheet are currently constraining our profitability.

Similarly, the higher cost of funding our legacy loans and credit facilities over the next three years is affecting our margins on a consolidated basis.

As more and more of our assets are in the bank, and more of the bank capital is deployed at higher yields, our already-respectable margins should increase significantly over the next three to five years, particularly as credit issues fade along with the recession.

Next I want to review some of the key financial metrics I spoke about on our fourth quarter call in February.

We felt it was appropriate today to update those numbers, as we now have the first quarter behind us.

We expect total commercial assets, which include loans, loans held for sale, the A participation interest, our sale leaseback assets and related accrued interest to average $11.4 billion during the year.

They were $11.4 billion in the first quarter, and we expect a modest increase during the year as loans in the bank grow so much faster than the expected reduction in the A participation interest.

Excluding the A participation interest, we have previously indicated commercial assets would average $10.6 billion for the year.

They stood at $10.3 billion at the end of the first quarter.

Though the $200 million of loans funded in the first quarter at CapitalSource Bank is shy of the run rate needed to achieve our expected full-year loan growth target of $1.4 billion, we are still comfortable with that level of new loans by year-end, which would result in the expected level of average commercial assets.

Our pipeline is strong, and approximately $262 million of loan commitments were approved at the bank but not funded in the quarter.

Our previous full-year estimate of $925 million to $975 million of interest, fee, and operating lease income excluded the RMIP portfolio because we knew the agency, RMBS, in our compliant portfolio would be sold in January.

First quarter interest fee and operating leasing income of $281 million includes approximately $31 million of interest earned from our residential mortgage assets.

Including the owners' trust, which is now part of the other commercial finance segment, we now estimate full-year consolidated interest, fee, and operating lease income will be in the range of $1 billion to $1.1 billion.

Likewise, our interest expense in the quarter of $131 million included $23 million of interest expense for the agency RMBS prior to their sale and the owners' trusts.

We now estimate that full-year consolidated interest expense will be $475 million to $500 mil.

Net investment income this quarter of $150 million was at the top of our previous estimate of $525 million to $600 million for the year.

Run rate operating expenses of $63 million excluding depreciation and amortization and a one-time charge are consistent with our expectations of quarterly operating expenses of approximately $60 million.

About 40% of those expenses are for the operation of CapitalSource Bank.

As John mentioned, charge-offs of $124 million in the first quarter were consistent with our full-year projection of total charge-offs in the range of $300 million to $400 million since we expect the first quarter to be the highest level for charge-offs with a modest decline throughout the year.

Loan loss provisions of $155 million were higher than we anticipated.

We continue to be conservative, and I believe realistic in our reserve assumptions, however.

So we have rebuilt the reserves this quarter to a level somewhat higher than charge-offs.

As expected, excluding the book loss on the convertible debt conversion, we saw less volatility in the Other Income lines for the quarter.

Of course, the greatest volatility over the last three years has been in connection with the agency portion of our residential mortgage investment portfolio, which has been sold.

Any foreign exchange gains or losses and investment gains and losses will, however, continue to flow through Other Income in future quarters.

Don Cole will now provide his insights on the quarter.

Thanks, Dean.

Let me begin by explaining some of the changes you will see in the format of our financial reporting this quarter.

Specifically, we have modified our segment disclosure to reflect the way we are viewing the business, going forward.

We still have three distinct segments, but the composition of those segments has changed.

One segment that remains the same is our health care net lease segment.

This segment contains the same basic business as reported in 2008.

Among the changes, first, as the key component of our playoff and strategy, CapitalSource Bank is now shown on a stand-alone basis in its own segment.

Second, we are now presenting a segment called "Other Commercial Finance," which contains all the legacy assets and liabilities of the Company not associated with the bank or the health care net lease business.

Finally, as previously announced, we have eliminated our residential mortgage investment segment.

You will also now see a column titled "Intercompany Eliminations," which removes the impact of certain transactions between the segments to arrive at the consolidated numbers.

I mentioned the elimination of our residential mortgage investment segment.

This change reflects the continued simplification of our business and occurs in conjunction with the sale of our remaining agency ARM BS securities and related derivatives.

These transactions resulted in a net gain during the quarter of $15.3 million.

The only remaining assets associated with the formal residential mortgage investment segment are the two owners' trust, which are now included in our new Other Commercial Finance segment.

The assets of these trust appear on our balance sheet as mortgage-related receivables, and the debt is included in the term deadline.

This debt is non-recourse to the Company, so our total exposure is limited to the net equity we retain, which had an approximate book value of $69 million at March 31st.

Key drivers of earnings in the quarter included net investment income, which was $150 million, very much in line with the prior quarter.

Interest and fee income declined about $47 million in the quarter due to declining interest rates and a slightly smaller base of loans, but falling interest rates also resulted in a decline in interest expense of approximately $45 million.

Net finance margin for the CapitalSource Bank and other commercial finance segments increased 68 basis points to 3.89% on a combined basis as compared to the fourth quarter of 2008.

A primary driver of the increase was the existence of interest rate floors on many of our loans, the vast majority of which are currently in the money due to the very low level of short-term interest rates.

Because of the aggregate balance of loans within the money floors, however, if LIBOR interest rates rise in accordance with the current forward curve, we will experience the negative impact on loan spreads of approximately 24 to 40 basis points by year-end.

While these floors had a positive impact on spreads in the quarter, a factor that negatively impacted spreads with a relatively higher level of loans on non-accrual.

Turning to the balance sheet -- loan repayments in our legacy portfolio not surprisingly continued at a moderate pace in the first quarter totaling $100 million.

In light of anticipated loan extensions, we expect this slower-than-normal pace of repayments to continue throughout 2009 and into 2010.

The decrease in loans in the legacy portfolio was offset by the new loans at CapitalSource Bank, as Dean has already discussed.

As for the A participation interest held at CapitalSource Bank, payments received in the first quarter totaled $330 million.

At March 31st, the outstanding balance was $1.1 billion, which represented 27% of the outstanding loan pool of $4.1 billion that secures the participation interest.

And additional payment of $92 million has been received since the quarter closed, and we continue to expect to be paid in full during 2010.

Moving to the liability side of the balance sheet, we thought it would be helpful to provide some incremental details about the loans in each of our six securitizations.

All are non-recourse, but each has a somewhat different mix of loans.

For example, the securitization known as 2006-1 contains loans with a balance of $194 million.

The outstanding debt balance is $163 million, which resulted in equity balance held by CapitalSource of $31 million.

This represents an effective advance rate of 84%.

The loan pool yields 8.5% as compared to our debt coupon of one month LIBOR plus 44 basis points.

This results in a healthy net interest margin of approximately 750 basis points.

The mix of loans includes 65% asset-based loans and 35% cash flow loans.

We have posted a slide on our website this morning that has the same details for the other five securitizations, which we refer to as 2006-2, 2006-A, 2007-1, 2007-2, and 2007-A.

In addition to our term securitizations, we currently have six credit facilities.

Five are non-recourse to CapitalSource, and the sixth is the syndicated facility, which is recourse debt.

The collateral package for each of the non-recourse facilities is limited to their specific loan pool.

The syndicated facility collateral package includes loans specifically pledged to that facility as well as the CapitalSource Bank stock, the health care REIT stock, the equity in our securitizations, and certain other assets.

At March 31st, the six facilities collectively have principal outstanding of $1.4 billion including $934 million in the syndicated facility and $466 million in the five other secured facilities.

Loan collateral securing the non-recourse facilities totaled $885 million, giving them an effective advance rate of approximately 53%.

Some details regarding each of these credit facilities similar to the information provided for our securitizations, are also shown on a slide posted today on our website.

As John indicated, we renewed one of the non-recourse facilities in April known as CS Funding VII, and we are currently in discussions with our lenders about three other facilities, which mature in 2009 -- CS Funding III, QRS Funding I, and CS Europe.

CS Funding III had a maturity date of April 29th but has been extended for 30 days during which time we expect to close out our revised facility.

As we indicated at the time we announced the renewal of CS Funding VII, that facility now has a three-year term at $50 million of incremental borrowing capacity for unfunded commitments.

We intend to pursue similar durations for the other credit facilities so that we can more closely match fund the loans in those facilities similar to what we have accomplished with the loans funded in CapitalSource Bank and in our securitizations.

We remain confident of our ability to accomplish that goal.

As we work to make these changes on our credit facilities, we believe that our liquidity position about which John spoke in some detail, remains sufficient for expected needs at the parent, and, of course, particularly strong at CapitalSource Bank.

One area we continue to carefully monitor relates to our unfunded commitments, which declined during the quarter by about $550 million to $3.0 billion.

Of the remaining amount, $695 million are obligations of CapitalSource Bank.

Many of the non-bank commitments are either at the full discretion of CapitalSource or require the borrower to pledge additional collateral to obtain additional advances.

Because of these factors, we have seen no measurable difference in the draws on unfunded commitments in recent quarters and do not anticipate any change in the coming quarters.

As John and I both mentioned, the renewal of CS Funding VII added a $50 million line for certain unfunded commitments.

We also continue to have availability of $83 million in the revolving tranche of our 2006-A securitization to fund additional advances on assets owned by that facility.

Turning to our capital position, GAAP equity remains very strong at the bank at $916 million.

Likewise, the parent company had over $1.9 billion of tangible common equity at quarter-end.

Total risk-based capital at the bank was 17.2%, and the bank's ratio of tangible common equity to tangible assets was 13.1%.

The tangible common equity ratio at CapitalSource, Inc., was a combined 17.1%.

I will now turn the call over to Tad Lowrey, who will provide a brief update on activities at CapitalSource Bank.

Okay, thanks, Don.

As Dean mentioned earlier, we continue to see excellent opportunities to make high-yielding loans with type structures to high-quality borrowers in the bank.

We are also capitalizing on the current dislocation in the CMBS commercial mortgage-backed securities market and applying our underwriting discipline to the purchase of seasoned securities.

During the last quarter, we purchased $77 million of triple-A rated CMBS with an expected yield to maturity of 15%.

The bank's liquidity position remains strong, and we have the ability to fund more than $1.1 billion in new loans and unfunded commitments while also deploying up to $300 million of lower-yielding short-term investments in CMBS and other securities.

We also foresee significant paydowns on the A participation interest for the remainder of 2009, which will create more liquidity meaning we expect to meet our origination targets and still close 2009 with ample on-balance sheet liquidity.

We remain cautious in this environment, however, and will not deviate from our conservative underwriting guidelines for the sake of achieving this lending volume.

The volume of new loans funded in the first quarter amounted to $200 million of which about $15 million came from CapitalSource legacy loan maturities.

Our pipeline is strong, and we continue to see new opportunities each week to lend money to small and mid-sized businesses who are finding few sources of capital to fund their operations.

As has been previously stated, our capital levels remain very strong.

At quarter-end we had total risk-based capital ratio of 17.2%, about the same as year-end.

Our tangible common equity to tangible assets ratio of over 13% is among the highest in the industry.

Combining this excess capital with our liquidity position, and we have ample room to continue to grow our national lending franchise.

Recognizing that excess cash is a drag on earnings and with the confidence that can manage our deposit levels by adjusting the CD rates we offer, we've lowered our CD rates and incurred a nominal level of deposit runoffs, ending the quarter with $4.7 billion in deposits while reducing our funding costs by over 33 basis points.

Such costs have continued to fall since quarter-end.

The monthly payments, which average about $100 million from the A participation interest adding to our liquidity flexibility.

I am highly confident we can grow our net interest margin meaningfully over the next few years, as we both grow assets and see the full benefits of redeploying our lower-yielding assets into higher-yielding loans and investments.

I want to touch briefly on our credit quality.

At quarter-end, the bank's non-performing loan ratio, which we express as our percentage of core loans, which excludes the A participation interest, was 79 basis points, and we had no delinquent loans.

All of the non-performing loans are currently paying that are on non-accrual status due to our doubts about the full principal collection.

In the first quarter we had a single charge-off of $10 million on a cash flow loan to a business that was a direct victim of current economic conditions and is no longer viable.

We added another $15 million net to reserve this quarter to bring our total allowance to loan losses to $71 million.

Despite the low level of non-performing assets and no REOs, we have prudently built our allowance up to 240 basis points of core loans due to the economic conditions.

In closing, as a de novo bank, we receive lots of attention from our regulators.

Our interactions, to date, have been very constructive and productive including three separate regulatory visitations since we opened in July.

No surprises emerged from these visits, and we continue to believe that we have a strong relationship with and support from our regulators.

John will now wrap up before we take questions.

John?

Thanks, Tad.

So as we focus on the execution of this play offense and play defense strategies that I have outlined, I remain convinced of the substantial value in our overall business though the market continues to discount our assets.

Given the current economic climate and concerns about credit performance and liquidity, CapitalSource is far from the only financial services firm selling at a discount.

We have made substantial progress in a number of important fronts in the first four months of the year, and we'll continue to work hard for the balance of 2009 and beyond to accomplish the objectives we have laid out.

Before closing, I want to briefly review our four business components, which include, first, CapitalSource Bank, which Tad just described -- it's a clean, well-capitalized bank paired with a historically strong CapitalSource asset generation platform.

At March 31, CapitalSource Bank had no delinquencies, a very manageable level of non-accruals, $4.7 billion of deposits, approximately 60,000 retail deposit customers, book equity of $916 million, and a clear ability to raise additional deposits as it needs to fund its growth.

The second component of our business is our health care net lease business, which is comprised of 184 skilled nursing facilities, which we own and lease back to operators.

Similar assets, along with our other health care business, have held their value quite well in the current economy and are generally viewed as defensive investments.

We believe these assets are worth their current book value of $500 million or more based on any objective market analysis.

The final two components make up the bulk of our "Other Commercial Finance" segment.

We have $4.4 billion of our commercial loans that are currently permanently financed in match funded term securitizations with $3.4 billion of debt, which is the third component of our business.

Each of the securitizations is non-recourse to CapitalSource.

We essentially own the residual interest totaling approximately $1 billion.

The fourth component of our business is what I previously have referred to "everything else." Included here at the $2.2 billion of loans that are funded by our credit facilities, $144 million of equity investments, a net REO portfolio estimated at approximately $94 million, and a residual interest of approximately $69 million in the owners' trust portfolio.

There is clearly substantial value among the four components of our business, well in excess of our current market capitalization.

In conclusion, I believe in the short-term, we will continue to make steady progress on the simplification of our business, the effective management of credit and liquidity at the parent company, and the prudent growth of CapitalSource Bank.

Taking a longer-term view, investors should focus on our current balance sheet strength and pre-provision earnings power, which will sustain us even under a severe stress scenario that we laid out.

Over the next two to three years, we expect to be able to meaningfully grow our net interest margin, or this pre-provision earnings, if you will, as we redeploy lower-yielding assets in CapitalSource Bank, pay down our credit facilities, and experience a return to a more normalized credit and capital markets.

We are now ready for questions, Operator.

Thank you.

(Operator Instructions) John Hecht, JMP Securities.

The first -- just a couple of further questions about the credit experience during the quarter.

First, if I heard you right, you are expecting charge-offs to kind of level off and come down despite higher increased non-performing assets.

Is that going to be the result of better [sealing] of non-performing assets or is that going to be the result of better recoveries.

And what are you seeing out there when you do liquidate a loan in the markets?

Well, John, it varies a lot by the type of loan, obviously, to the extent the non-performing loans are more asset-based.

We have higher recoveries.

Historically, prior to the recent market conditions, we were experiencing recoveries for asset-secured loans of certainly in excess of 80%, and for a long period of time we had recoveries on asset-secured loans in excess of 90%.

And then our recoveries on things that were more enterprise-value-based tended to be more in the 70%.

That's the way it used to be.

The way it is now is things with hard assets we're generally seeing recoveries in the 50% to 75% range, and businesses or problems that are more enterprise value, sub-50%.

So there has clearly been a meaningful effect on recoveries.

What's happened, our problem assets -- one of the things with the problem assets -- if we have a $40 million loan that we feel like we need to take a $3 million specific reserve on, and if we feel like that's really the liquidation value of the asset, so you market a loan from 40 to 37, the whole 40 becomes a non-performing loan.

So one of the things that happens with the non-performing assets is if you take any specific marks on them, it moves the whole asset to the non-performing category.

So to the extent you end up taking relatively modest nicks on asset-secured loans, you end up potentially ballooning your non-performing loan category, which is why our non-accruals exceed our delinquencies.

Many of these loans are still current.

Okay.

I don't know if that helps.

No, I see -- it's a classification and a kind of credit pipeline situation along with higher recoveries it sounds like that you're experiencing in the asset-based loans relative to maybe a couple of months ago.

Yes, because even if you take a very small provision on an asset loan that's current, you can't really have it as an accrual asset any longer.

I got it.

That's great color, thanks very much.

Second-- a couple of questions on the bank.

You saw good amortization of the A piece and good loan production.

Is it fair to think that the strategy will be, as the A piece continues to amortize fund loans with that, and with the excess of the amortization above what you can fund loans with, you'll do things like buy high-yielding AAA CMBS?

Is that a fair way to think about the asset base at the bank level?

Yes, and what I'm going to do is actually have Tad add a little to that, but the one comment I would make is when we're looking at some of these high-yielding, say, CMBS assets, we are obviously very careful as to what we're looking at because there is a big difference between buying a 2001 vintage CMBS bond that is 50% cash defeased, which is the kind of stuff we're trying to do, versus buying a more later-vintage bond.

So I want to make sure people understand what we're really focused on.

But, Tad, why don't I have you add some more color to the question.

Okay.

John, there is -- what you said is basically correct, but a couple of things to add to that.

Even if the A participation piece amortization slows down, we have plenty of on-balance sheet liquidity to fund loans for the remainder of the year and redeploy some of these short-term securities in CMBS and other things, but we do expect the A participation interest to continue to pay down.

So we think we are going to meet our targets and still end up with quite a bit of liquidity, going forward.

The key to this, though, is it's allowing us to be pretty aggressive on our deposit rates, and by aggressive I mean lowering these deposit rates, and we're picking up quite a bit of spread just by continuing to lower those, and they've fallen another 30, 40 basis points on the entire base just since quarter-end.

And final question on the new loans you're writing at the bank.

You wrote $200 million this quarter -- well, two-parts question -- did you say 15% of those were written from some of the -- I guess you call it -- legacy capital source pool?

And, second, is what kind of spread are you getting those loans, and then I'll step aside and thanks for answering the questions.

It was $15 million, so it's quite a bit less than 15% for the legacy loans.

And I think John quoted the spread, it's 780 over LIBOR, John?

Yes, it's 780 over LIBOR, and effectively the bank is in a position, upon maturity of a loan, to -- at CapitalSource -- to effectively provide a new loan to the borrower, and that's what those -- that $15 million was.

Andrew Wessel, JP Morgan.

Just starting on a couple of housekeeping things -- the QRS facility in the CapitalSource Europe -- what are the actual stated maturity dates today for those?

The QRS -- which facility did you --?

The QRSI and the CapitalSource Europe, those, I think, I believe, the two you said that are still --?

CapitalSource Europe is in September.

CapitalSource Europe maturity is September of 2009.

And the QRS1 is April of 2010, and that is currently in its amortization -- one-year amortization period.

Great, and so are those -- when you mentioned those three -- that, in conjunction with CS III, are those -- because it's in this amortization period, are you trying to get back to your asset facility pushed out -- maybe move the maturity date out and also move the amortization period out?

Our basic strategy is to try to essentially roll the three together to have the same term and same period.

You roll the two domestic ones together and keep the European one separate, which there is an argument as to why that may be better just because of the nature of the collateral and where it's located.

Right, right, no, that makes sense, thank you.

And then on the unfunded commitment of the holding company, based on that slide, it says $133 million of capacity and $2.3 billion remaining unfunded.

I know in the fourth quarter you said basically none of those really had the ability to be -- for the most part, had the ability to be funded due to covenants or other restrictions.

Is that sure the case?

Do you still see the vast majority of that $2.3 billion unable to be funded today?

Yes, and it's unable -- it's not just covenants.

A lot of those things are collateral-dependent, and a lot of the collateral requires our pre-approval and things like that.

So it's not just -- a certain number of companies, obviously, that have covenant issues in those -- that borrowing is not available, but there are a large number of companies that are performing just fine, but they don't have the collateral and normally to acquire additional collateral, we would have to approve it.

And business is such that they're a nursing home with $5 million receivables, and a $20 million line, and the only way they can get more financing or to use the $20 million line is to buy another nursing home, which we effectively have to approve.

So there are some great performing companies in there that don't have any real way of accessing their commitment based on the way it's structured.

And just to add to what John said, I mean, we haven't seen any change in the draws or performance on any of those unfunded commitments, largely for the reasons he cited.

And also we take a close look at this regularly to see where we think these things are going, over time, and we haven't seen any change in (inaudible) forecasts.

Great.

So that's $130 million-ish that you have available from the parent company right now -- that feels -- you feel very comfortable with that amount based on your outlook on those commitments?

Well, you're adding together the 2006-A number and the new credit facility number, which is the 130 --

Right.

And, obviously, we have cash on the balance sheet or the available cash that John mentioned of $175 million and other cash from operations.

So, yes, between all those sources, we feel comfortable with our ability to fund the unfunded commitments at the parent.

Don Fandetti, Citi.

Hi, good morning.

John, it seems like the bank funding position is obviously very strong, and the parent company maybe a little bit tighter, but you have some options like the HUD financing.

How quickly could you sell, or monetize, the real estate portfolio if you had to?

Do you feel comfortable that there is that demand?

Yes.

We actually do.

We've got a couple of the -- we've sold some already.

We've got a couple of properties under letter of intent including kind of a substantial portfolio.

And then we have kind of a core group of assets that we think there might be some interesting steps towards monetization paths that we're pursuing.

So, as you know, Don, because you understand these companies well, these health care net lease businesses, it's a stable asset, the sector has performed well.

Recently there have been transactions -- the capital-raising transactions in the space, and we think that it's one of the assets where there is actually more liquidity.

One of the things that helps is HUD is actively lending in the sector.

So that helps because you do have -- that's historically been a good source of liquidity for the sector, and the sector has relied upon it historically, and the HUD financing programs have not been interrupted based on what's happened in the rest of the world.

So there is liquidity kind of at the small operator level where people can actually get financing from the government to buy these assets.

Now, that's not an easy process, we're in the middle of it now, and it's a time-consuming, cumbersome process, but your tolerance for those kinds of things are much greater these days, right, when it's one of the best sources of financing.

So there is HUD financing available to us, there is HUD financing available to smaller operators who we think are interested in buying the assets.

As I said, we've sold some assets already.

We've got some letters of intent signed, or at least one good-sized letter of intent for a portfolio of assets.

And then the residual assets, we think there are some interesting things we could do with them on the larger, more strategic side, particularly with the space feeling a little better, as you know from your work in the space.

So that would be my view.

Okay, and then, just quickly, can you just remind us what the trigger risks are on some of your CLOs?

Kind of a [bear] case scenario?

When you say "trigger risk" --?

Is there anything that would force a liquidity event on any of your CLOs or CDOs if credit would deteriorate --?

No.

They are non-recourse in every respect, so there is no ability for the bondholders to demand capital from CapitalSource.

Sameer Gokhale, Keefe Bruyette &Woods.

I just had a few questions.

The first one was -- and I think Dean went over the outlook update, and I may have missed it, but in terms of the loan loss provision -- was there a specific point number or range -- you had given an updated range for 2009?

No.

Okay.

Based on the Q1 results, is there a sense you could give us for relatively that $175 million to $250 million where you think we could end up?

I don't think we have any update at this point.

Okay.

Dean covered both where we were relative to what we talked about last quarter.

And then he also covered the results of the stress test we ran on the business.

Okay.

And then in terms of the -- just looking or eyeballing the numbers, it looks like your loans paid down, your portfolio paid down at perhaps a faster rate this quarter than last quarter.

Could you just confirm whether you think that's right and, if so, what kind of color could you give us on that?

What is driving the increase in loan paydown, sequentially?

Well, I'm going to let Don answer the specific question.

What I will say is that in the last week or two, we actually have seen a little bit of uptick in liquidity in the underlying portfolio.

I think the world is feeling slightly better.

You're starting to see a little more activity, which we think could lead to greater prepayment rates, which we think would be good.

In terms of the specific question, I'm going to defer to Don.

I think there were a few paydowns more in this quarter at the parent side than there was in the past.

I think those were specific situations.

I wouldn't say we view that necessarily as a strong trend for more aggressive paydowns and, obviously, another component of the loan decrease was related to the charge-offs in the quarter.

But I wouldn't say that we've seen a significant uptick in paydown speed.

Okay, yes, I was referring to the paydown excluding the charge-offs.

But it seems like in Q4 of last year, maybe the markets are just kind of frozen and now maybe we're seeing a little bit of thawing, and that's what I wanted to get color on.

I think you are -- directionally, I think you are right.

I think the first quarter is -- your math is probably correct, but I think where we could start seeing those trends is in the next few quarters because, as I said, anecdotally, there is definitely a little more action in the portfolio.

And I would say that's kind of rearing its head in two different ways.

First of all, in our REO assets, we have definitely seen a dramatic uptick in activity for these assets.

We've got about $100 million portfolio of REO, which, by the way, is marked pretty hard when it goes into REO based on a pretty involved valuation process.

And I would say in the fourth quarter, the activity was slow on some of these assets, and we've definitely seen an uptick in terms of people -- you know, multiple bids on assets, people coming in and putting in bids for pools of assets, and that's an encouraging sign, that people, while they're still looking to invest in things like this at very high rates of return, there is at least a rate of return that they seem willing to invest in, and I think that's good.

And then also we did see (inaudible) and some prepayments might increase in the underlying loan portfolio.

Again, it's early, but to your point, Sameer, things are feeling a little better.

We may see a little more strategic M&A activity, which could create more liquidity in the corporate finance portfolio, and so I think, again, it's early but, directionally, it seems to be moving in the right way.

That's really helpful color.

And then just my last question, and maybe it's just early days here, you're kind of ramping up the bank, but perhaps some perspective on any progress in terms of capturing incremental revenue streams.

I think one of the ideas when you bought the bank was you have all these customers, if you offer them checking accounts and lockbox services and things like that, you may have some cross-selling opportunities.

Has there been any progress along those lines or, so far, maybe you've just been busy with other things at this point?

Yes, I'd say there are two things -- one, we are busy with other things, even thought that isn't, clearly, part of our business plan.

Secondly, we have to resolve the parent company's bank hold company status, which, when we didn't obtain it at the end of the year has been on a slower trajectory, and I think it's our view that we want to get our debt financings in place before obtaining holding company status really makes sense.

So I think the priority of the bank is to grow the bank through lending.

The priority of the parent, in addition to managing credit is to extend our credit facilities, and I think once that's done then holding company status makes more sense, and then we can change some of the services that are available in the bank.

Michael Taiano, Sandler O'Neill.

I just had a few questions.

Just going back to the recoveries question earlier -- when you said the recovery rates on loans that are backed by assets is somewhere in the $0.50 to $0.75 on the $1.00 range now.

Does that also include commercial real estate, or is that just --?

That was actually really -- that was really the commercial real estate number.

We haven't had many recent pure asset-based liquidations to speak of, unless -- missing one.

So that's really commercial real estate.

Okay.

I should have said that more specifically then because that's where we have a little more data.

And that would compare to 80% to 90% in, like, previous years?

Yes.

Okay.

And then just on the health care REIT -- I guess two questions -- one, are you seeing -- is there an issue now that you are no longer a REIT in terms of competitiveness whereas one of the reasons I think you converted, was a REIT was said to be more competitive in that business.

And then, secondly, I know it's still early, but it looks like the equity markets are starting to stabilize some, and so could you maybe give us a sense of timeline over what you would consider going forward on the spinout?

The CapitalSource health care REIT, which is the portfolio of 180 nursing homes -- is a great business, and it's performing really well.

We're not giving it capital at this point to grow itself, so it's effectively got a great management team and kind of a static portfolio.

It is organized as a REIT still, but it is not owned by a REIT any longer, so it effectively pays us dividends, but we pay tax on those dividends.

We're not paying tax now on those dividends because of the loss that the company had but, theoretically, when we return to paying tax, we'll be paying tax on those dividends.

So it makes sense for CapitalSource health care REIT to end up in the hands of people who want to own a health care REIT, and the path that we pursued in the past was to take the Company public.

We picked a bad week to do that, we picked the week that Lehman Brothers failed, to try to take it public, which wasn't great timing, and we were unable to get it done.

We still view that -- that those assets should end up being owned by people who want to own a very steady stream of tax-efficient dividends backed by health care assets, which we view as defensive.

So we're clearly going to continue to try to move in that direction.

In the meantime, we are paying some of our capital out of the business through HUD financings and some pruning in sales here, but what we'll effectively end up with is kind of a core, modestly levered equity position in that business that we want to do something with, because it's not -- CapitalSource is the owners of that business, is ultimately not the best thing for that enterprise because we don't plan on giving it additional capital to grow, and it should grow because it's got a great team, and it's a really good business.

So it ultimately should end up being somewhat separate from us.

It's a longwinded answer to your questions.

The short answer to your question is we are definitely focused on moving in the direction you are indicating.

Trying to figure out the best way to do that is complicated, and we're early in the equity market for recoveries, if you will.

So we're just evaluating all those things.

Great.

And then just a final question -- any update on whether you guys would be able to utilize TALF on your commercial real estate loans?

Well, the program that's announced is focused on new originations.

So our portfolio is a legacy portfolio, and what they have rolled out, thus far, is not focused on loans that were originated prior to a certain date.

So as the -- and I'm not an expert on the TALF CMBS program, but it appears the initial version is focused on new originations, and will do a very nice job starting the new origination market, it seems to me, with a couple of caveats.

One caveat is until you tighten the spreads of existing bonds, it's going to be hard to sell new bonds.

And so I think what will happen is some combination of them potentially pushing back the date for legacy loans or, quite frankly, people just re-writing their old loans with new loans and then potentially making them TALF-eligible.

So I think we can't answer that question specifically, but the observations we have are similar to observations other people have, which is it's a great step.

Getting the CMBS market restarted is critically important.

This is clearly a step in the right direction.

I think a lot of people would want some tweaks, one of the tweaks being using it for pre-existing bonds or some legacy loans.

That would be helpful to us.

And then I think the other thing people are trying to figure out is can you just rewrite old loans and new loans assuming they conform and happen to be TALF-eligible, and I don't think there's a clear answer to that yet.

Well, in other words, if you have extensions on some of these commercial real estate loans that you mentioned earlier, those would be eligible for TALF?

I don't think the devil is in the details on some of these things, and I don't think a lot of those details are fleshed out.

I think people are saying, "Well, what if I have a loan that I originated last year, and it's performing well.

Can I call up the borrower and just give them a new loan to refinance my old loan?

Would that be eligible suddenly?

So I think people are trying to get their hands around those questions.

Right.

Those things weren't addressed.

Theoretically, it is a new loan, and the TALF underwriting criteria for CMBS is restrictive, but theoretically, if you write the new loan, and it meets those underwriting guidelines, the fact that you refinanced down an old loan, does that make it ineligible?

I don't think that question has been answered.

Maybe as people probe around, and what will happen is they'll just push back the eligibility so they don't have to deal with that question.

So -- I think there is more to come.

Scott Valentine, FBS Capital Markets.

In terms of negotiations with some of the lenders, have you noticed any change in the receptiveness over the past couple of months?

Do they seem to be more open to negotiation?

I would say the answer is yes.

I think, on a very high level here, the fourth quarter and the first quarter were very stressful for everyone.

They were stressful for the large banks, obviously, and it was very stressful for borrowers from large banks, and some of the re-negotiations we did were in the middle of that very stressful period.

And I'm very pleased to say that we were able to accomplish those re-negotiations and still maintain a terrific relationship with our lending partners.

I think there is a sense of -- things are calming down a little bit.

We are clearly seeing, without getting into specific data, but we are clearly seeing additional liquidity in lots of little corners of the credit markets.

I think the stress test process seems to have been very constructive and productive.

And so I think everyone is a little more calm these days.

We have maintained, even through a period of significant stress, very good relationships, I believe, with our lenders and, listen, these lenders have been terrific partners to us over the last seven, eight years, not only as institutions but as individuals within the institutions, and we value those relationships tremendously.

I think they generally have a view that we've done the right things from not only a strategic standpoint but from a capital standpoint and liquidity standpoint, and I think they clearly see in us a lot of the things we talked about here, which is that there is a very vital and valuable business at the other end of this cycle.

And so I think there is a lot of -- there is a very good environment for us to work through what we need to work through with them, because it's not only in our interests, but it's in their interests.

So this is not adversarial, this is not attorneys talking to attorneys, restructuring people talking to workout people, these are business people talking to business people, working out deals that I think will be good for CapitalSource and therefore good for them.

So that's how I would describe the relationship right now.

Okay, that was helpful.

And then just in terms of credit migration -- it sounded like maybe the C&I or the cash flow loans were the first loans to see stress, and now it's, of course, moving to commercial real estate.

But is that the general trend you've seen?

Yes.

Okay, and then commercial real estate appreciates the geographic concentration -- is there way you can break out by type maybe -- office versus lodging versus retail?

Yes, we can.

It might be better for us to -- I know we've provided that detail in the past.

I don't think we have that specific detail right here, but we have no issue giving that to you.

Okay, I could follow up, all right.

And if we decide it's something that we need to disclose to everyone, we'll just put it on our website and tell you.

Nicki, we have time for one more question.

Thank you.

Bob Napoli, Piper Jaffray.

A couple of questions I don't think were asked yet.

But when you guys look at your portfolio on a monthly basis, is the performance of the companies pretty closely on a monthly basis, is that correct?

To the best of our ability, we do that.

So as you look at those companies, are you seeing any incremental signs of stability generally or not?

Clearly, what happened is the rate of decline has slowed or flattened, right?

And so I think people look at that and say, "Well, that's what happens before things start going the other way." And I would say that's generally what we're experiencing.

What is CapitalSource's outlook for the economy?

How do you guys feel -- the year is going to play out economically for -- in the US?

I think there are couple of variables that are very hard to pinpoint -- what the savings rate of the country will ultimately be; what will happen to the market, because that affects people's view on their wealth and ability to spend.

So the key variable is really spending.

The government has done a good job providing tremendous demand into the system through the stimulus bill, right, because consumers weren't spending, so the government stepped in and is doing it.

I think the consumer spending rate is way up, which is good, long term.

We don't want it to go too high, because if it goes too high, then there will be no spending in the near term.

As the markets feel a little better, will the savings rate kind of settle in at 4%?

If so, I think you could see the economy recovering this year.

So I think our general view is that we'll see some recovery in the economy this year, which doesn't mean you won't have the lagging asset issues way into '10, right, because the economy recovering and asset values returning are two different things.

I think our view is probably that economy recovery is the end of this year; asset values don't really stabilize into -- solidly -- next year.

The bank is under-leveraged.

Are there any restrictions, regulatory restrictions, on the growth of new assets, on the timing of growth of new assets, that are tied to the bank?

The answer is obviously yes and no.

Yes, in that we have capital levels we have to maintain, so you can't grow too fast, right, outside your capital, because we've got plenty of cushion there, as you know.

Secondly, we have a business plan approved at the regulators, which shows us growing this business a certain amount over three years, and that business plan -- you'd look at it and say, "That's terrific growth." So that's not a limiting factor for us, but we couldn't triple the size of the bank without having the regulators approve a new business plan, but can we grow the bank's loans from $2.9 billion to $7 billion?

Yes, we can do that.

So -- there are some larger restrictions, but there are not restrictions as it relates to the kind of things we're talking about doing.

I'll defer to Tad to provide any more color on that.

I think that covers pretty much all of it.

The key restriction is -- Bob, is 15% risk-based capital, but that expires in a couple of years, and we think it would go back down to maybe the 10 level but, as John said, even at that 15% risk-based capital level, we have so much excess capital now, we can hit those numbers.

Then my question -- I'm trying to tie together the economy and the bank -- I think the competitive environment is probably better than you've ever seen it.

Is that a fair --?

If I had to give you one word to describe the competition, I would use the word "nonexistent."

Right.

Now -- and there is a big secondary market for loans.

I think you could probably buy at pretty -- I mean -- at what point do you get comfortable enough with the economy that you would take the move to put on a larger amount of incredibly priced and structured loans into the bank?

You did $200 million in the quarter, but there has got to be so much opportunity out there.

Yes, there is.

I think the bigger factor is that we've always had a very rigorous underwriting here at CapitalSource.

I would say that underwriting process has expanded now even further because the banks -- the existence of the bank has created an additional overlay of things we have to do in our underwriting process.

So I think that process is just going to take time for us to underwrite loans.

So there is somewhat of a limiting factor of how much volume we can do based on that.

And we certainly don't want to make any mistakes early on with the bank.

The most important thing that we're focused on, as an institution, is not doing anything to screw up the bank.

So we're being very careful about the underwriting and loan approval process.

And so that's somewhat of a limiting factor.

Secondly, there are things you can underwrite in this market.

I know other things that are very hard to underwrite in this market.

It's very hard to underwrite a retailer in this market.

Sure, you can do some kind of an asset-based deal, but even if it's asset-secured it becomes a criticized asset in the bank, and that doesn't look good.

So we're trying to find things that we think not only are safe in the traditional way we've looked at safe, but are also safe in the judgment of the regulators in terms of not having optical hair on it even if we think it's money good, do you see what I mean?

Mm-hm.

And so the bottom line is we're focused really hard on health care; we want this business in the future to be 50% of health care, because we've learned that that's a very stable and incredibly profitable part of our business, so we're really, really focused on health care.

Our technology business has done great, our security finance business has done great.

We are really pushing those things.

Interestingly enough, there are incredibly good opportunities in commercial real estate, but it's mostly financing people who are buying debt, we think.

Meaning there are lots of situations out there where people have put up $50 million to buy something.

They borrowed $100 million, they are underwater at their $150 million basis.

They can buy their senior loan back for $60 million, and they want to put in $30 million and borrow $30 million to buy the senior loan.

So suddenly you're making a $30 million senior loan on something that someone made a $100 million senior loan on a few years ago.

There's a lot of that kind of stuff out there in commercial real estate that we're very focused on.

So we're really trying to do stuff that's very safe and get very, very strong returns.

I don't think it's the right strategy for the bank to just be hitting the -- trying to hit the ball out of the park every time.

We want to hit solid doubles and triples with the thing, because what we think will happen, and that's why we spent some time with the stress test and asked someone to help us go through it, which is -- clearly, there are a lot of losses in the system.

We have them, and everyone has them.

They are going to work through, so the question is -- what does the business make at the other side?

What's going to happen to us is we're going to redeploy all this liquidity we have and really drive our pre-provision earnings, and, guess what?

There will be a quarter where there are no more provisions, and then you just have a very high earning stream in the business.

What are the incremental yields that you're putting on today, John?

Well, the stuff we did in the first quarter was about 800 over.

Thank you, Operator.

Thanks, everybody, for listening.