PacWest Bancorp (PACW) 2010 Q4 法說會逐字稿

Good morning and welcome to the CapitalSource Inc.

fourth-quarter and full-year 2010 earnings conference call and webcast.

All participants will be in listen-only mode.

(Operator Instructions).Please note, this event is being recorded.

I would now like to turn the conference over to Dennis Oakes.

Please go ahead, sir.

Good morning, and thank you for joining the CapitalSource earnings call for the fourth-quarter and the full-year of 2010.

Joining me this morning are John Delaney, Executive Chairman, Co-Chief Executive Officers Jim Pieczynski and Steve Museles, CapitalSource Bank CEO Tad Lowrey, and Chief Financial Officer Don Cole.

This call is being webcast live on our website and a recording will be available later this morning.

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

We have posted a presentation on our website this morning that provides additional detail on certain topics which will be referred to during our prepared remarks.

Investors are urged to carefully 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.

While 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 with the SEC.

John will begin the prepared portion of the call, after which we will take your questions.

John?

Thank you, Dennis.

2010 was a pivotal year in the Company's transformation to a business model which pairs an independent regional bank and a national lending platform.

First evidence of this progress is the fact that 65% of total Company assets were in CapitalSource Bank at December 31, 2010, compared to 46% one year earlier.

The Bank loan portfolio grew 25% during the year, while most of its peers struggled to add assets.

We also acquired three new lending platforms, improved net interest margin, and significantly lowered cost of funds at the Bank.

We achieved every important aspect of our 2010 plan, including the elimination of over $2.5 billion, or 55% of parent company debt, reducing it from $4.5 billion at 12-31-2009 to $2 billion at the end of this past year.

We finished the year with $467 million of unrestricted cash at the parent.

Amending the senior secured notes in December, provided meaningful financial flexibility, expanding our capacity to effectively utilize this cash, including for the redemption of the convertible debentures in July of 2011, which currently have an outstanding balance of $281 million.

Our credit improved throughout the year.

The quarterly loan loss provisions averaged less than $30 million for the final three quarters of 2010.

In addition, our non-accrual loans declined from $1.1 billion at the end of 2009 to $700 million at the end of 2010, a 35% drop.

I also want to point out that January marked the one-year anniversary of our new management structure, which includes Steve and Jim as co-CEOs, Tad as CEO of CapitalSource Bank, and my role as Executive Chairman.

This arrangement has worked extremely well.

Jim is based on the West Coast, where he focuses on loan origination and coordination with the Bank's executive management team.

Steve, who is based here in Chevy Chase, has focused his attention on our regulatory relationships and shrinking the parent company's portfolio.

They also are working together to reduce operating expenses, and obviously work closely with Tad, who has skillfully guided the Bank through a highly successful year from a financial and regulatory perspective.

Their collective focus on day-to-day operations allowed me to concentrate my efforts this past year on certain important strategic and financial initiatives, which is where my experience and personal contacts had the greatest impact, and which we successfully completed.

I want to touch briefly on the Company's primary goals and objectives for the year ahead, before turning the call over to Jim.

Our first priority is to convert CapitalSource Bank to a commercial charter, and Steve will provide an update on our progress as it relates to that.

Continuing to turn excess equity at the parent into cash, through normal loan payoffs and asset sales, is the second priority.

Doing so will permit us to reinvest excess cash in the Bank or return it to shareholders.

The third objective is sustained net loan growth at CapitalSource Bank, of course.

Achieving these priorities will substantially complete the transformation I spoke about earlier.

Finally, our overriding goal is to grow our consolidated profitability, which is dependent upon loan growth, stable credit, and reducing operating expenses.

CapitalSource is well-positioned to achieve these goals.

It has a deep bench of talent, a super-strong balance sheet, and a valuable deposit and asset platform.

The wind is now in the Company's sails in a fashion we have not had the luxury of enjoying for several years, and I am extremely proud of the work we have done through this important transition, and I want to personally thank everyone for their hard work and support across these last several years.

Jim is up next, and will focus his remarks on what an outstanding performance our loan origination teams have this year.

Jim?

Thank you, John, and good morning everyone.

Our loan origination accelerated as 2010 closed.

We funded a total of $536 million in new loans in the fourth quarter, which was a 32% increase over the prior quarter.

New funded loans for the year topped $1.6 billion, and we are expecting 10% to 15% growth in new originations during 2011, which we expect will take our yearly total to the $1.8 billion level.

Quarterly production is likely to be uneven, but we expect it to be in the range of $400 million to $500 million per quarter.

Based on the loans that have already closed in January and February, combined with others that are in our pipeline, we are confident that the first quarter will meet our expectations.

New loans in the fourth quarter were spread among most of our loan products, with the largest concentration being in equipment finance, from our corporate asset finance group.

Technology cash flow, healthcare cash flow, multifamily, and general commercial real estate were also substantial contributors.

Throughout the year, it is important to point out, that a different one of our 12 business groups had the highest loan production each quarter, which demonstrates the strength of our diverse national origination platform.

Our healthcare asset-based lending business led the first quarter, while our commercial real estate and healthcare real estate groups led the second and third quarters respectively.

As I just mentioned, our corporate asset finance team led the charge in the fourth quarter.

Our productivity level in 2010 was a clear demonstration of the strong national lending franchise, which CapitalSource has built over the last decade.

Total production was significantly strengthened moreover, by the addition of three new business segments during the year.

The corporate asset finance, small business, and professional practice lending groups together accounted for nearly 21% of our new funded loans.

Our multifamily business, which completed its first full year of operation, contributed an additional 14%.

Our perennial strength in healthcare lending, including asset-based, cash flow, and healthcare real estate, were also evident, contributing another 28% of the total.

The result of this is that the Bank experienced net loan growth of $143 million in the fourth quarter, despite having $232 million of loan payoffs, and an additional $89 million of principal payments.

That growth was evenly balanced with 32% being asset-based loans, 37% being cash flow, and 31% being real estate, which includes multifamily, small business, and healthcare real estate.

We expect average contractual yields to tighten a bit during the course of 2011, due to a combination of increasing middle market competition, and the ongoing shift of our total portfolio to a higher overall percentage of relatively lower-yielding small business, multifamily, and equipment finance loans.

So in many cases, those areas tend produce lower all-in contractual yields, the capital requirements are lower for the multifamily loans and the guaranteed portion of the SBA loans.

Because we have a depository platform, with a relatively low cost of funds, we will still be able to maintain a very attractive net interest margin despite any decline in overall yields.

Our entire originations, underwriting, and closing teams did a spectacular job in 2010, and we anticipate an excellent 2011 as well.

As we look forward to the year ahead, one of our key strategic goals for the company, is to achieve meaningful net loan growth at CapitalSource Bank, while redeploying and reducing excess liquidity, while still maintaining our absolute underwriting discipline.

We have the personnel in place to continue to grow our annual production, with an originations engine as strong as we have ever had.

As the economy continues to improve, we expect our quarterly asset generation will continue to grow as well.

Steve will now provide details on some of the other key performance metrics for the Bank last quarter, and give an update on parent loan sales, and our efforts to obtain a commercial banking charter.

Steve?

Thanks, Jim.

And good morning everyone.

In addition to loan originations, the fourth quarter demonstrated an all-around strong performance for CapitalSource Bank.

Net interest margin increased by 7 basis points, to move above 5% as our cost of deposits declined further and non-accruals decreased by $102 million, almost 30% below the prior quarter.

New non-accruals totaled only $12 million.

In fact, all of the credit metrics at the Bank improved again last quarter.

The loan loss provision declined from $15 million, to $10 million.

Charge-offs were significantly lower at $16 million, compared to $48 million in the third quarter, and both short-term and 90-plus day delinquencies declined meaningfully.

The credit performance of loans made since the July 2008 inception of CapitalSource Bank, highlights the fact that the bulk of credit issues at the Bank are related to the Bank's legacy loans, rather than those loans originated following formation.

For example, at year-end 2010, total loans at the Bank were $3.8 billion, with $2.4 billion, or 62% of those loans originated following the Bank's formation.

Looking only at that group of post-formation loans at December 31, 2010, we can see that $49.6 million, or 2.1%, were on non-accrual, and only $32.2 million, or 1.4%, were greater than 30 days past due.

Moving onto OpEx.

Operating expenses at the Bank were up about $3 million in the quarter, although approximately $2 million of the increase was attributable to incremental loan referral fees paid to the parent due to the higher than anticipated level of loan production.

On a consolidated basis, for the full year, we made substantial progress in our efforts to reduce total operating expenses.

We saw a decline of nearly $50 million, or approximately 17.5% in OpEx from 2009.

Much of the savings comes from a significant reduction in outside professional fees and other expenses related to loan workouts.

We also were able to create efficiencies internally, by streamlining business functions, paying off debt, and selling loans throughout the course of 2010.

As a result, we reduced employee headcount by just over 5% last year, despite adding nearly 55 people connected with our three new lending groups that Jim just mentioned.

At year-end, we had 622 total employees.

For the full year 2010, net interest income at CapitalSource Bank increased by 35% as we brought down the Bank's cost of funds by over 100 basis points to 1.34%, and more than doubled new loan production.

With this performance as a foundation, and the projected loan originations which Jim just discussed, CapitalSource Bank is extremely well-positioned for another strong year of profitable growth in 2011.

Based on a forward LIBOR curve, we expect our cost of funds at the Bank to rise modestly during the year, but remain below 1.3% on a full-year basis.

We expect the net growth in the loan portfolio, however, should permit us to maintain a 5% net interest margin for the full year.

We expect the full-year ROA at the Bank to be in the 1.25% to 1.5% range.

Turning next to our efforts to obtain a commercial banking charter for CapitalSource Bank.

Although the existing charter does not present any barriers in terms of the projected growth and profitability in 2011, there are a number of longer-term benefits to a commercial charter, that we would like to pursue.

We previously indicated that our plan was to file a bank holding company applicattion with the Federal Reserve in the first quarter of this year in order to get the formal review process underway.

Based on conversations with the Fed, however, we now understand that the process will involve more interaction with Fed staff before the application itself is filed.

This should allow us to better tailor the application to meet regulatory requirements.

We have been and continue to be engaged in active and ongoing, on-site meetings and other productive discussions with the Federal Reserve staff, which will further clarify the actions we must take before our application is filed.

We look forward to their continued guidance as the Federal Reserve evaluates our readiness for Bank Holding Company status.

The process is moving forward, and we still expect it will be concluded in the second half of this year.

Before closing, I want to comment briefly on our efforts to sell loans from the parent portfolio, as we continue to reduce parent company assets, pay off debt, and further strengthen our balance sheet.

In addition to REO sales, and some small individual loan sales during the quarter, we recently reached agreement for the sale of approximately $140 million of loans in our $275 million European portfolio at year-end.

A significant portion of the remaining loans in that portfolio are expected to pay off in the ordinary course during the first half of this year.

Since the beginning of this year, we have also paid off all of the remaining Bank debt on over $1.5 billion of loans held at the parent outside of our securitizations.

As market prices continue to improve, for many of the assets in this portfolio, we will strongly consider the sale of additional loans.

As loans pay down, pay off, or sell, we expect our unrestricted cash will increase.

Although we are disposing of assets at the parent, excess cash and a strong capital position at the Bank position us to be a buyer of loans and portfolios in our areas of expertise.

While we have routinely purchased loans in the past, there are now increasing opportunities to do so in many of our markets.

To capitalize on these opportunities, we have recently moved one of most senior executives in our Manhattan office into a full-time role of identifying loan portfolios available for purchase by CapitalSource Bank.

Don is up next, and he will provide additional financial highlights from our fourth quarter performance, particularly on a consolidated basis.

Don?

Thank you Steve, and good morning everyone.

The fourth quarter and the full year 2010 presented a story of declining debt, improving credit, and increasing liquidity.

The Bank had a terrific year as Steve just indicated, but on a consolidated basis, there were many positive signs as well.

Pre-tax, pre-provision, pre-other income for the fourth quarter improved $45 million from $40.5 million in the prior quarter.

This was driven by higher loan yields, a reduction in interest expense, and relatively stable operating expenses.

The quarterly loan loss provision also declined from $39 million in the third quarter, to $24 million, the lowest level since the first quarter of 2008.

This resulted in an improvement in our net interest income, less provision and operating expenses, from under $2 million in the third quarter to nearly $21 million this quarter.

Our overall profitability in the fourth quarter was hurt, however, by REO losses and expenses of $20 million, and mark-to-market losses of $20 million on loans we sold or intend to sell as we continue to trim the parent company portfolio and dispose of assets.

$11.5 million of the loss related to loan sales was attributable to the pending sale of $140 million of European loan assets that Steve described.

Our ultimate loss on the sale of these loans will be closer to $8 million, as some of the loans will be sold with the gain that will be recognized during the first quarter when the transaction is complete.

This net loss is very much inline with the level of reserves maintained against that proposal as of September 30.

Both the REO losses and losses on the sale of loans are reported in the other income portion of our income statement.

That section is comprised largely of nonrecurring items, and was the biggest driver of the change in earnings per share from third quarter, as it moved from $41 million of income to $17 million of net expense.

As you may recall, in the third quarter, other income included a one-time gain of $17 million resulting from the deconsolidation of the 2006-A securitization, and $39 million from gains on equity investments.

REO expense was also $13 million lower in the prior quarter.

Turning to the balance sheet, as John indicated, during 2010 we reduced parent company debt substantially.

Including the health care net leased debt that was outstanding as of December 31, 2009, parent company debt was reduced from $5 billion at the beginning of 2010 to just over $2 billion at the end of the year.

Subsequent to year-end, we have paid off and terminated all of the remaining short-term credit facilities, with the exception of our syndicated bank facility.

That facility continues to have a zero balance, and we expect to terminate it at some point during the next several weeks.

The term securitizations continue to pay down, as well.

With approximately $167 million of collections in the fourth quarter, reducing total third-party debt on those deals to $694 million.

Our net equity in the full remaining securitizations was approximately $246 million at quarter-end.

As John mentioned, liquidity continued to strengthen at the parent as our unrestricted cash position increased to $467 million at year-end.

The repayment of all of our secured credit facilities will only further enhance the cash position at the parent as less of the principal and interest collections on loans will be required to be applied to debt amortization.

The amendment to the senior secured notes, which was approved by note holders in December, substantially increased our financial flexibility.

The biggest immediate benefit is our expanded capacity to use available cash to redeem the 2011 and 2012 convertible debentures.

The amendment also significantly increased our capacity to repurchase stock and/or pay increased dividends.

I mentioned the reduction in the quarter of our loan loss provision.

As John touched on, our other credit metrics on a consolidated basis improved as well.

Non-accruals decreased by $89 million from the third quarter level of $788 million, and the rate of new non-accruals also decreased.

Both short-term and 90-plus day delinquencies declined, as did impaired loans.

Our capital levels at the parent and the Bank remain high.

At December 31, cash and investments at the Bank were $2.1 billion, and total risk-based capital was over 18%.

Due to the anticipated profitability of the Bank, we expect our risk-based capital levels will remain well in excess of our current regulatory minimum throughout 2011, despite our expectation for significant loan growth.

Before closing, I want to touch on taxes for the fourth quarter and for the year ahead, as well as our DTA valuation allowance.

In the fourth quarter, we recorded a small net tax benefit on a consolidated basis.

The Bank recorded tax expense based on its standalone profitability in the fourth quarter, that Bank tax expense was offset by anticipated tax benefits recorded at the parent.

Looking forward to 2011, as we have indicated, we will become eligible to file a consolidated US Federal Tax return.

This means that we will be able to utilize losses from some entities to offset income at other profitable entities, principally the Bank.

Ultimately, until such time as our DTA valuation allowance is reversed, our GAAP tax expense would look much like the fourth quarter with Bank tax expense based upon profitability, offset by parent benefit.

The key difference in 2011, however, will be that instead of paying its tax liability to the IRS as it will for 2010, the Bank will pay its tax liability to the parent under our existing tax sharing agreement.

As we expect to continue to be profitable on a consolidated basis, the utilization of parent losses by the Bank for GAAP purposes will slowly reduce our valuation allowance.

As we have indicated previously, for a significant reduction of the valuation allowance that will likely result in a large net tax benefit on our income statement, we will need to have demonstrated a sustained period of positive pre-tax income.

There is not a bright line test in the accounting literature for making this determination, but we do not expect to reach that point before the end of 2011.

The importance of demonstrating a sustained period of profitability for GAAP purposes is that it allows us to consider our expected future taxable earnings as a source to utilize our DTAs.

As we move closer to that time, it is important to consider how our expected taxable earnings will match up against our current DTA.

The gross DTA at December 31 was approximately $510 million.

The largest portion, representing over 40% of the balance, comes from net operating loss carry-forwards.

We expect to use these carry-forwards against future taxable income.

A much smaller portion of the gross DTA, approximately 10%, is from capital loss carry-forwards.

Capital loss carry-forwards can only be used to offset capital gains.

Therefore, we may maintain some valuation allowance against this portion of our DTA until we can clearly forecast capital gains within the statutory time period.

The remainder of our DTA is comprised of GAAP losses that have not yet been triggered for tax purposes.

The largest single component of that comes from our loan loss allowance.

However, smaller amounts come from GAAP write-downs on assets that if realized, would likely result in capital losses.

Similar to the existing capital loss carry-forwards, these will need to be utilized to offset capital gains during the statutory period, so that clock has not yet started to run on these items.

It is also likely that some portion of these unrealized losses will not ultimately be realized, as certain GAAP marks should reverse over time.

The tax area is clearly very complex, so I would be happy to address any remaining questions in the Q&A portion of the call.

At this point, I will turn the call back to Jim for some concluding remarks.

Thanks, Don.

In summary, we believe the fourth quarter was positive, with $536 million of loan production, significant loan growth at the Bank, and the continued delevering of the parent.

We are moving closer to filing our bank holding company application, we are projecting our ROA at the Bank to be in the 1.25% to 1.5% range for 2011.

We also expect to continue to delever the parent as loans payoff or are sold.

With this, we are very excited for our prospects in 2011.

Operator, we are now ready for any questions.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions).At this time, we will pause momentarily to assemble our roster.

Our first question comes from John Hecht of JMP Securities.

Please go ahead.

Good morning, guys, thanks for taking my questions.

First of all, related to the division of the European NPA commission T1.

Looking forward, you have a pipeline as potential other large REO, NPA assets, I guess it's coming out of North America now.

Is there any pipeline you can refer to for that to give us an idea of when the REO and NPA levels might drop further?

What will that mean to REO stats in the near term quarters particularly through European distribution?

Let me make clear one thing.The European loan portfolio is a performing loan portfolio.

There's no NPAs or other problem loans in that portfolio.

It was just non-core to our business going forward, which is why we determined to dispose of that portfolio.

Okay.

As far as the pipeline, I think, we are actively trying to out-place our REO and our nonperforming assets.

That I would view as a significant pipeline.

We've seen, just from the numbers coming down, we've had some success there.

As the new situation is rolling in there, reduce, that number should hopefully come down even more rapidly.

I would think that is where our pipeline is and that is where our focus is.

Obviously, as we said, if we can get trim some of the parent company assets, based on current markets and get acceptable prices, we will consider, continue to consider that.

Really the European is almost an identifiable stand alone.

We've pointed out to people before, just because it is a non-core and non-US and therefore has some additional expenses we're operating in Europe associated with it.

Just remind, as I think Steve pointed out in his remarks, the sale is about half of that portfolio, but we suspect a very significant remainder of the portfolio will just pay off based upon its own, either terms or natural prepayments within the portfolio in the next few months.

Thanks.

Can you give us a sense for what the assets for that total portfolio that might move off the balance sheet the next few months?

I don't that specific number.

It kind of gets embedded in a lot of areas, where it's tax expenses, tax compliance expenses in the US.

It's a little bit spread out.

The actual European expenses, there's not that many people over there at this point.

So, I wouldn't call it a material number that necessarily next quarter you'll see drop out of the income statement.

Okay.

And, second question.

Can you remind us when you equipped your de novo charter, and what kind of flexibility does that present to you guys.

Is there any maneuvering with the Fed that you have in getting an updated charter that has to do with the de novo status as well?

Tad, do you want to take that question?

Yes.

Hi, John.

The situation is that we believe that the entire order placed upon the Bank, by both the FDIC and DFI expires at the end of July of this year.

So, all of the items in the order such as prohibition of paying dividends, specific capital requirements to the Bank, and a number of other management and structural issues would go away.We are not far along enough with the Fed to engage in many discussions with them in any type of order restrictions that they would place on either the holding company or the Bank.

We really view those on two separate paths.

Great.

Thank you very much, guys.

Our next question comes from Don Fandetti from Citigroup.

Please go ahead.

Good morning.

John, you mentioned the Company has the wind at your sails and I was just curious, obviously there's a Wall Street Journal article suggesting that maybe you are looking to sell the Company.

I'm not sure if you're in a position to talk about that.

Or refute it.

We will start there.

Yes.

I mean, you know what our answer is on any of these things, Don, which is we don't comment on rumors at any level.

So, but I do think the wind is at the Company's sails, so I'll certainly take this opportunity make that point again.

Okay.

We think things are going great for the business and it's got a very bright future.

I know there is also been some talk that you are involved in potentially another private company.

I don't know if you're going to ultimately take some type of deeper role there or that sort of, one of many type of investment situation?

Again, consistent with the theme of my prior remark which is, this is CapitalSource call so I won't discuss other personal or professional things that I am engaged in on the call, but I would be happy to chat with you off-line about it.

Okay.

And then on the business.

If I recall, you have pretty decent sized Genesis Healthcare loan --.

Yes.

That's unencumbered.

I was just curious.

There's some talk about that getting refinanced .

Do you think that is still a

I will refer to Jim.

There was a specific article, which you are probably referring to, where in the commercial mortgage alert I think it was, but Jim, why don't you provide some more detail?

We have read the article and we certainly have been talking to our borrower.

Obviously, the loan still has what we have in terms of our unencumbered assets is the large mezzanine loan that we have.

We know that the asset values in the skilled nursing space has certainly increased over the years, and we believe there is significant equity over and above our mez debt.

Also, with the change of the market, the possibility of them either doing a refinancing or an outright sales of those assets is a very reasonable likely outcome.

As for the timing of that, I don't know when that would happen, but the summary is, we feel very good where we are at with assets.

Okay, and if I could just ask last one for Steve.Steve, I mean, do you think you get bank holding company status by year end?

I believe it is a statement.

What is your confidence level there?

Obviously some things are stuck a little bit in terms of how the process works .

Any reason why you feel so confident on that specific date or what should we leave some room for

Yes.

I think come a first of all I feel very confident that we can get the Bank holding company status.

I think nothing is changed in terms of our ultimate timing, to becoming a bank holding company and we always said it would be towards the second half of the year.

What has changed is, filing the application after we have more conversations and visits with the Federal Reserve staff, in order that once we file it, it won't be on file for as long as it would have been, if we filed it and then started engaging in conversations with them.

That's really the rationale for the kind of change in order that we are always planning on coming in and talking to us several times, and obviously doing an examination at some point.

So, this is just, again, switching the order around but not changing the ultimate timing.

We feel very good about our chances, based on conversations with them and based on what we understand we need to do to become a bank holding company.

Okay.

Thank you.

Our next question comes from Steven Alexopoulos from JPMorgan.

Please go ahead.

Good morning everyone.

Maybe I'll start.

Can you talk about the expected amount of loan payoffs and pay downs that you think is reasonable in 2011?

Look, we get that question a lot and is obviously always difficult the forecast exactly what those are because it is based on a bunch of things.

One of which is just national market activity which, I would say if I just look back at 2010 was more active than what we thought.

So I think our pay downs on normal loans were faster.

The second is, actually our active efforts to remove loans which this European facility came about in the fourth quarter leading into this first quarter.

So I would hesitate give too much on loan payoffs.

We just talk a little bit about this Genesis asset and it's somewhat unknown as to when that will happen, it is still a bit chunky.

So I don't think I will give a specific number.

I would say the 2010 pace, while above what we expected is probably representative of where we think things will continue in 2011.

I think the answer is we certainly expect to have continued significant loan growth at the Bank.

Now that the ISO loan participation is paid off, with the originations that we are going to do, we will have significant loan growth.

As Don pointed out, there a lot of loans that can pay off that we really don't control over.

It is somewhat difficult to forecast what happens there.

Right.

At the risk of just repeating what everyone said here, I think our general view is the corporate credit markets are somewhere between normal and hot.

And, historically, when you look at the Company's portfolio in these kind of period, you saw pretty active prepayments.

So, that would be unreasonable assumption for 2011.

Okay.

I had a couple of questions on OREO.

First, what was amount of OREO that was sold in the quarter, and can you give the OREO balance at year-end?

That's being, give me one second and I will give you that information.

Do you have another question while Don looks that up?

What you're looking that up.

How are you thinking about OREO expense?

It was at $110 million for the full year.

Is that how we should think about this again in 2011?

Well I will answer that question first, I would say the answer is no.

Included in that line are both the expenses of operating REO, which we try not to have on the books for too long, and also marks or further mark downs after something has been foreclosed upon.

I think throughout the year, as values continue to climb, certainly in the first half, some of that was concentrated in the first or second quarters, we had some incremental marks there.

So, I would say our expectation that will stabilize and certainly not run the same level.

So, let me just give you the sense of the book value of our OREO at the end of the fourth quarter, was just over $90 million.

And, the sales proceeds in that quarter were about $25 million.

We have some new stuff roll in, we sold $25 million and we ended with about $90 million.

So how should we think about the marks on what you sold?

Like the further write-downs?

Needed to sell?

On the stuff that sold, this quarter, it was very close is to the actual marks.

There were a few things that did not sell that contributed to the marks I indicated during my part of the remarks.

The stuff that sold was right about the marks.

That they had been at in the prior quarter-end.

And I think you know it was a result of those marks that caused us to take further valuation allowance relative to the rest of the base that where we thought everything was going to be coming out.

That's why you're seeing that write-down that we have in the fourth quarter is largely a function of -- it is not a result of the assets that were sold.

It is more a function of the asset the are remaining and getting new appraisal information.

Okay.

And maybe just one final question.

I know you commented are ready a couple times on the application for the Bank charter being pushed from the first quarter to the second half of the year.

But can you give us a sense, where are you most focused and order to get the application filed?

Is it just a higher profitability level?

Is it credit quality?

Is it getting the Bank to a certain level of Company assets?

Any color there would be helpful.

Thanks.

Ask the question one more time?

I missed the beginning of it.

So, disregarding the application process for you to apply for the Bank charter, I am curious where you guys are most focused now, in order to get this process moving?

Is it moving profitability levels higher?

Is it getting credit quality to a certain level?

Or, is it just getting the Bank to represent a bigger portion of the overall company?

I think, yes, I think we are pretty happy where we are already on all those things.

I think for us, it is simply working with the Fed to understand more procedurally what they want the parent company to have in place, to look and feel like a regulated entity.

Obviously, we know how to do that given the Bank and the Bank's performance, but, the parent has not been regulated before, and so we just need to put a lot of policies, a lot of procedures.

I think on the substantive issues that you mentioned, we've made a significant process since we first tried this couple years ago and I think we have proven ourselves on all of those, profitability, asset quality, liquidity, earnings even.

Again, it is just a matter of procedures.

Thanks.

You are welcome.

Our next question comes from Sameer Gokhale with KBW.

Please go ahead.

Thank you.

John, I know you do not want go to a lot of detail or discuss your normal bank alliance, but I think it would be helpful to me as well to hear your thoughts on that at some point.

Given that I think investors are pretty focused on this issue, and how important you have been to CapitalSource over the years.

I think it be helpful to me to get your thoughts on that at some point.

In terms of a question, just a few here.The loan portfolio, there was an increase in the yield at the parent and I was wondering, if there more details specifically what that was due to, because it seems like an uptick in the non-accruals rate as such.

It didn't seem like credit improvement was necessarily responsible for that.

Could you give me some clarity on the yield improvement of the parent on the loan portfolio?

Sure Sameer, in the press release, we talk about yield on loan improvement, yield on assets improving.

I will touch on the loans first.

Included in interest income, is both the ongoing coupons people pay, but it's also any amortization of up front fees when things prepay.

So as we mentioned, there was a significant amount prepay activity on performing loans in the quarter, so there was a fair amount of that fee amortization that contributed to that yield improvement.

The second thing I would say, there's a little bit of mix here in the coupon area where a lot of loans that are prepaying are in the corporate loan markets.

There's a lot of loans that originated in 2005, 2006, 2007 when spreads were somewhat tighter, so, we are having a little bit of an improvement from mix shift.

I think it is principally the affect of the accelerated amortization of some of the fees and expenses.

Again, can you give us as is how much they contributed to the yield this quarter versus last quarter?

You used to provide that at one point and time in the past.

Yes.

At the parent, and I don't have that number in front of me, it probably was an uptick of 50 basis points of yield in the quarter from running roughly 50 in the third quarter just over a point in the fourth quarter.

Okay.

In terms of the new loan accruals, I know you have given the $99 million of new non-accruals, I believe that was at the parent, but can you give us a sense of what the number was on a consolidated basis both this quarter and last quarter?

If you have that handy.

I don't have it handy.

I'm not sure I recall the $99 million new non-accrual number.

Is that in the press release?

Yes it was in the press release.

Yes, is largely on the commercial loan base as the parent.

I think we can take some stuff and give you that info off line, Sameer.

Okay, that would be perfect.

Last question for now, which is the net charge-off at the parent.

You had some assets that you, on your balance sheet, the assets held for sale seemed to be up pretty significantly compared to last quarter.

I was wondering if any of those items flowed through the charge-offs at the parent, which contributed to the higher dollar amount of the charge-offs.

If you could just clarify that and provides more detail there.

Yes, the answer to that is no.

I mean, the loans held for sale, most of that, or the majority of that is the European assets, and there's a couple of other performing loans.Those were largely performing loans, and so any marks we took to sell them at discounts, principally not credit-related discounts were in that below-the-line area I discussed.

So those wouldn't contribute to the charge-offs in any material way.

Was there any sort of acceleration of charge-offs in that line item in the quarter?

Because it does that the parent had a pretty meaningful increase in the dollar charge-offs.

I would not call it acceleration.

I think in our package, you see which categories it was, I think it was a little more in our commercial, less real estate.

I think we said we had very high provision reserves in that commercial book or the cash flow book.So I wouldn't say it's anything--any unexpected acceleration.

Okay.

All right.

Thank you.

Our next question comes from Bob Napoli with Piper Jaffray.

Please go ahead.

Thank you.

Just to clarify, the guidance for $1.25 to $1.50 ROA at the Bank in 2011, what tax rate does that assume for the Bank?

For the Bank, that assumes the full tax rate.

Which, I mean in the fourth quarter was like a 50% tax rate.

(inaudible) again we are typically will be using a 40% tax rate.

Yes, not to get into too much tax, because I love discussing the topic, as I mentioned, the Bank doesn't have a federal deferred tax asset allowance, but it has some state items, so, the reason why the rate was little bit higher this quarter was for state purposes, some things they put on increased those state CPA's add a little more tax expense.

That shouldn't continue in the long term.

We forecast that at that closer to the statutory rate, as Jim indicated.

Okay.

And, on the parent or the non-Bank portion of CapitalSource.

What is, you did have some losses there.

You talk about the one-time items.

Do expect the non-Bank to, you would think that it would be profitable going forward, given the reserve levels, but do you expect to generate profits out of the non-bank as that business continues to liquidate?

I would say I wouldn't expect we would create material profits off of that.

I mean, if you think about that, the asset push should be fairly rapidly.

For the consolidated enterprise, there's still a fair amount of the expenses contained in the parent.

And, we still have, some of the debt that has the longest maturities is the highest cost.

So, we don't view that the parent on a standalone, if you look at our segment financials, it will be a material-material earner.

As I sort of mentioned, if you take it out on a pre-tax basis, because the parent tax will be able actually to generate some benefits offsetting bank expenses, but on a pre-tax basis, I don't think we view it is a material income producer.

It is really largely concentrated in the Bank.

The Bank is being run for profitability.

The consolidated entity is being run for profitability.

But an important subsidiary of the parent is to run it to liquidate it.

Because, then we think that cash can be reinvested into the Bank or returned to shareholders at a higher rate of return.

So, we clearly are not taking active steps to enhance the profitability of the parent on the revenue side, we are taking active steps to enhance profitability of the parent on the expense side.

On the revenue side, if we want to maximize revenues to the parent, we would keep the parent invested, and that is not our goal.

Our goal is to reduce the parent.

It is little bit of one step back to go three or four steps forward because give up a little profitability at the parent, get a lot of cash which you could reinvest at higher rate.

And, would you expect, I mean, to start repurchasing stock in the near term or are you going to continue to build cash balances, make sure you have the capital to pay debt requirements this year and next first, I mean, are you far enough along that you would start buying back stock?

Well clearly, debt requirements are the number one priority of the Company.

Obviously.

So, those will be taken care of.

We do have a stock buyback program in place, but again, we don't talk about how we are going to use it, et cetera.

We probably don't want to spend a lot of time speculating how we will use the program.

But we do have one in place.

Okay.

And, if you do get the Bank holding company status, are there significant expense saves?

Essentially, you are running two entities today.

Are there material expense saves and can you quantify that to some extent?

This is Jim.

I think from a-- the way we look at it is, I don't know if I would say there are going to be material expense saves but I think there is going to be just a general level of efficiency that we don't have the luxury of having right now.

I think we end up going through a dual underwriting process from the credit function.

We have separate accounting departments, we have separate IT departments, we have separate HR departments.

To the extent, we will be able to consolidate those departments and make those were efficient and effective.

That's going to make us more efficient.

I don't know if I would say there's going to be significant savings associated with that though.

The only thing I would add to that is if you see our year-over-year OpEx from 2009 to 2010, there was a fairly sizable reduction of about $50 million.

Just under $50 million.

So I would say there's more saves we think we can make in total OpEx in advance of the Bank holding company that are unrelated to that process including to push down our professional fees and loan work-out fees, et cetera.

We've still think there's room to run, even excluding the benefits of Bank Holding Company status.

Now we're about two thirds of the way through the first quarter.

What is the, what are you expecting as far as the dollar amount of NPAs as we move into the first quarter and through 2011?

Are you seeing signs?

Maybe give us a little clearer look.

I'll say what I said before.

We have seen the NPAs and the impaireds and all of these credit stats improve.

We expect those to continue to improve throughout the year.

The pace of new problems have slowed.

We expect to continue to work through the existing problems, and certainly on a percentage basis, we're to work to grow the Bank's loan portfolio, things should improve.

Okay.

Thank you very much .

Our next question comes from Mike Taiano, from Sandler O'Neill.

Please go ahead.

Hello, good morning.

Just a couple questions.

First, I wanted to understand the geography of where some of the marks came.

On the Euro loans, I think you said it was a $9 million mark.

Is that falling through the other income line?

The $6 million loss in the quarter?

Yes, the mark on the Euro loans in the fourth quarter actually was $11.5 million.I think I tried to touch on the marks without drilling down to too much detail.

When we sold these loans, we negotiated a price.

We mark each one individually.

Some of the loans have losses, a few have gains.

Unfortunately, the way GAAP makes you treat them is you take all of the losses now and you take the gains later.

So, the mark was $11.5 million in that other income line for Europe, and will get as I mentioned, about $3 million or little bit more than that back when the whole thing closes in the first quarter.

Okay, great.

Any losses on loans that you sold during the quarter with those that have flowed through the $20 million REO expense line?

If it was in REO, yes.

If it was a loan, I mentioned of that $20 million, $11.5 million was Europe.

We did sell a few other loans.

That contributed from going from the $11.5 million to $20 million on total marks on loans that were sold.

As I mentioned with Europe, we do have general reserves allocated to those pools and our marks came in that situation very close to that.

As with some of the other loan sales, it is the same thing.

We feel good about the levels at which we are selling, although we do take some of these marks because we are selling, some of these things have fairly low yields on long-term so there is a little bit of the discount at the sale point.

Okay.

And, I guess on that topic, I mean, you obviously are generating a lot of cash at this point, but would you consider selling nonaccrual loans if you think that the cash proceeds of those pretty good returns out there and new loans?

Even if you take a loss, do you think about taking it now, so that you can redeploy that cash into higher yielding assets?

Yes.

We absolutely consider selling non-accruals and non-performers .

Obviously, we will consider the bids.

We are not going to take bids that are fire sale prices that we think we do better by holding a little bit of time.

Our goal is to move those things out as quickly as sensibly, or make sense for us to do.

So, and we have done that and that's part of the reason why some of the non-performing asset numbers got better, we have worked through some of those.

We will continue to work hard to move those out, even if it means small incremental marks, but we're not going to, like I said, take fire sale prices versus what we think ultimately an asset is

There is an organized effort across both the parent and the Bank to manage that process as well.

Okay.

Just a last question.

I want to make sure I understand margin guidance for the Bank.

You are basically saying that yield is likely to come down because of the mix shift, and that the deposit costs will be relatively stable.

So, the reason why the 5% margin is expected to stay stable, is that because loans are running off and the Bank are lower margin loans relative to what you're putting on?

Well, yes.

I think that there is a combination of all that.

I think when we look at where our net interest margin was at the Bank for the fourth quarter which was at the 5% level, and, we believe that although, one of the benefits we have is although we're going to have some of the declining yield on the loans, our cost of deposits is also stabilizing as well too.

So I think when you take into account the addition of the loans, coupled with the loan growth that results in, that is what is going to get us to the point where we will be able to maintain that net interest margin.

This is Tad.

There's one other factor that I'm not sure you mentioned, and that is, we do expect the investment portfolio, which consists of a lot of short-term cash to run down substantially in 2011, and that the yield on that is almost nothing and that will be replaced with loans in the 6% to 7% yield.

So it is a mix improvement as well.

Okay.

That is helpful.

Thanks.

Our next question comes from Henry Coffey from Sterne, Agee.

Please go ahead.

Yes.

Good morning everyone.

Thanks for taking my question.

Don, can you help simplify the tax situation for us?

You obviously pay taxes at the Bank.

You then have an offsetting credit at the finance company or the holding company level.

Does that equal zero taxes for every quarter or a low sort of 20%, 25% tax rate on a combined basis for every quarter?

I was wondering if you help us with the math a little bit.

Henry, so I would ask if you could help me simplify it.I think the forecasted view is that it should stay close to the zero level.

Obviously there's a lot of complexities embedded, but the simple way to look at it going forward into 2011 on is now that the Bank and the most of the parent entities will be treated as a consolidated federal tax filer, basically, as the Bank generates income, it can then use parent carryover losses, any incremental parent losses to offset it's income.

So we will look at, for purposes of even GAAP taxes, we will look at it as one consolidated unit.

The expectation would be the consolidated taxes on a tax expense basis should run close to zero.

Obviously there are state tax IDs and some states we don't file a consolidated file there, so there's going to be some noise in there, but I wouldn't say I'd expect it to be up in the 20% range.

I expect it to be down in that closer to the 0% range.

It will bop around the number some during the year.

Ultimately, when we get to the point where we can reverse more of the DTA, we will have obviously a big sort of negative tax expense or tax benefit in one of the quarters.

And, I didn't hear exactly how you put it.

This is the reversing the DTA as a 2011 event or beyond 2011?

I think the way I put it was probably not before the end of 2011.

So, again, as I tried to say--I tried to say before, the rules aren't exactly clear.

We try to forecast on our profitability.

The way we got to this was looking back twelve quarters and saying we were at a cumulative loss position.At the end of 2011, we will be looking at 2009, 2010 and 2011.

We lost a lot of money in 2009, we had a net loss in 2010.

So it is going to be a while before our pre-tax basis, we kind of dig ourselves out of the hole.

From a bright line test, again we said that we think is something before that is possible but, it is hard to forecast it being anything before thinking about the end of this year.

You wouldn't want to see how to simplify the tax code.

It would probably just be pay everything.

We can be hopeful the corporate tax rate might go down but, we certainly don't forecast for those items.

Okay.

In terms of, I know that there has been a lot of discussion about this whole, quote, strategic alternatives et cetera.

As you look forward, you are building up a lot of cash.

You certainly have the resources to pay off the converts and the high-yield debt.

Is there a trigger point where, during the course of 2011, you work out some situation with the high-yield debt holders and just pay it off, absorb the fees, the make holds, et cetera, just given the cost of that note versus your cash accumulation, or is that really something you wouldn't think about doing until we got past paying off both converts in 2011 and 2012?

I'm sure we're joined on the call by some of our high yield holders, so we probably don't want to speculate too much about what we'll do with their bonds, but, these things are, these decisions are part mathematically based, right?

So, we'll look at our highest use of cash, and we have lots of alternatives, invest in the Bank, return to shareholders, or buy back debt.

I mean that's a very, I'm sure I'm avoiding your very specific question there, Henry, but all I can do is talk about how we would frame our analysis.

Well, you put together a great 2010 John, so congratulations.

Thank you.

Our next question comes from John Stilmar from SunTrust Robinson Humphrey.

Please go ahead.

Thank you.

Good morning.

I'd like to focus for second, it seems with regards to the origination franchise, or portfolio acquisitions at the Bank, that you seem to be targeting.

Any more color that you can provide there on the types of portfolios that you're looking at?

You done a great job in the past here of acquiring platforms.

This is more of a platform acquisition, or is this more of a portfolio acquisition.

Can you paint a finer brush than the comments that you made in the prepared remarks?

Sure.

When we talk about, we talk about originations for the year, which was roughly, as I said, was $1.6 billion, that did not include the acquisition of the Main Street lender which was our small business platform that we acquired.

So if you add -- So putting that aside, that's about $100 million portfolio that we acquired in connection with the acquisition.

So, we talk about our numbers, we did not count that acquisition as a funding during the year.

In our $1.6 billion number.

In terms of the areas, where, a large part of our portfolio acquisition was in the multifamily area this year.

Then there other areas as well.

I think if you sit there and look at it, and say, what percent of our total portfolio, of our total originations were portfolio purchases would be in the 25% to 30% zone.

We, quite frankly, view, direct origination and portfolio purchases the same when we think about it from an origination perspective and we think there are good opportunities out there for us.

In terms of what we are looking at going forward, obviously, multifamily is an area that we will continue to look at.

And has been a source of a lot of our portfolio acquisitions but in addition to that, when you look at our other specialty areas such as in the re-discount area or in our equipment finance area, that's an area that we would also be looking to acquire portfolios.

So anything that would fit into our specialty lending groups now is something that is a portfolio we are interested in acquiring, but in addition that, we are also looking at lending platforms, so that if we acquire portfolio in addition to bringing in a team, we're certainly willing to entertain that as well.

Those could be tuck ins under existing businesses or new platforms that are in areas that we don't lend in right now.

If you were to prioritize, is it more on portfolios or more on platforms?

I wouldn't say we prioritize one over the other.

We recognize that direct origination is a critical aspect of what we do.

But, we also recognize that, to the extent that our portfolio is out there, and we could get a nice chunk of performing loans in one fell swoop, we absolutely want to do that.

We go to the same level of diligence on portfolio as we would on a direct origination.

However, let's face it, with portfolios, you can get some built-in economies of scale by looking at a large portfolio coming out of the box.

So the answer is, we will look at both, the more meaningful way to move originations is through portfolio purchases, but, we are just as committed to direct origination as we are portfolio purchases.

Okay.

And then, with regards to the pricing environment, you talked about top-line yields being in the 6% to 7% range.

What would your guidance have been--what would that number have been last quarter?

How much of it is due to a more conscious decision to choose to originate certain types of assets versus how much of it is due to competition.

You alluded to both, but I was wondering if you could give us some clarity around the magnitude of each of those?

I think if you sit there and say, what was the all-in yield that we had during the fourth quarter, we were roughly at a 7% level.

So when I talk about a narrowing going forward, the way I think about it is, if you look at it relative to the spreads that we are charging on loans, we have got different products that are all going to be based differently.

For example, if you look at our SBA and our multifamily businesses, the spread that we're going to have on there is generally going to be in the 275 to 325 zone, but that is also an area where we also have lower capital requirements.

As a result, we can still get a strong ROE.

Relative to the other areas that we are in, we are probably going to be seeing spreads in the 4% to 5% type range, maybe as high as 5.50%.

But that, is probably lower than the 5% to 6% spread range that we were at earlier this year.

Okay.

There's probably some up front and other types of fees with that, or is that just the all-in?

Correct.

That's right.

When we talk about the all-in yield, most of the world is used to thinking about spreads, but when we add in the amortization of our commitment fees and our exit fees and the like, that's how we are able to get our yield up there.

Great.

Just one other point.

Operating expenses the consolidated company.

When should we start to expect progress on some of the opportunities on a dollar basis?

Certainly you alluded to the opportunities on a dollar basis going forward, as well as the pure organic operating margin from a rehabilitated portfolio.

When should we start to expect progress and can you give us any kind of clarity about the magnitude?

It may not be significant, but is there anything that you could point towards or maybe narrow band for dollars of expense savings over the coming couple of quarters?

I think in terms of, when you say, when can we expect to find progress, I think we have had significant progress this year.

If you look at where we were at the end of our OpEx in 2009 versus 2010, we had a decline of roughly $49 million on an OpEx basis.

I think, we taken a lot of expenses out of the business.

I certainly think we have more expenses that we are going to be able to take out, and as Don alluded to, a lot of that is going to be largely in the professional and work out fees.

I think in terms of where we ultimately, hoping to migrate to, I tend to think of OpEx as a percentage of our overall assets, and when you sit there and say, where do we want to be.

Our goal is to be getting somewhere in that 1.50% to 2% range.

I think we are going to be--we will be getting closer to the 2% range originally, but I think, as we are able to accelerate our growth with the platform that we have, I don't see us really needing to increase our expenses significantly so as a result, I expect us to be continue migrating closer and closer towards that 2% and lower level.

And is also important to note, Steve mentioned this when he was talking as well, too, is if you look at what we did from a headcount perspective this year, we actually had a reduction in our staffing level this year but that was despite adding 55 people that were there for the new platforms that we had.

So, I think you're going to have, to the extent that we're going to make investments in bringing in teams, we certainly want to be able to do that.

Thank you guys.

Our next question comes from Douglas Harter from Credit Suisse.

Please go ahead.

Thanks.

I was wondering if you could help reconcile the guidance that the cost of funds at the Bank would go up with the comment that the deposits you are renewing are under 100 basis points?

Yes.

This is Tad.

There are two things going on there.

One is our guidance is based on the forward yield curve.

There's an expectation that rates will go up and we will have to pay more for poor maturing CDs.

We also are forecasting significant deposit growth as we finally out strip our liquidity.

So, there's a slight premium built in for that, whereas our deposits are roughly flat today.

So we are paying down if you will.

What type of maturities are you targeting on your deposit growth?

I would say we are targeting, we are offering between six and 24 months and we are having some success recently with getting depositors to go out as long as 18 months.

We have about 20% of our new money and roll-overs that is coming in at 18 months which of course we view as favorably based on our rate forecast.

Consumers are, they read the newspapers as well.

The great majority of our deposits are in, the CDs are in the six to eight month range.

Great.

Just switching topics to the securitizations.

You've seen continued pay down there.

When do you expect that those will start contributing cash to the parent company?

I think it is still a ways out.

If you look at the slide that's in our investor presentation you can see, they're all very different, a lot of it is the 2006-2 securitization is still fairly highly levered and in turbo mode.

That is not any near-term cash return.

The 2007-2 one has paid out fairly quickly at lower leverage.

Depending on [pay to] repayments, that could be an earlier one.

We don't view that as a material source certainly in the near term.

Great.

Thank you.

We have time for one more question.

And the question will come from Bruce Harting from Barclays Capital.

Please go ahead.

Thanks.

If we're sitting here a year from now, looking at your progress for 2011, it just seems like there's a lot on the come here that's pretty positive.

Will you talk a little bit about the Bank strategy?

A year from now, will we be spending a lot more time on the call talking about retail growth strategies for deposit gathering ?

In your thoughts, could you do an acquisition right now?

A fill-in acquisition in your core retail market or your banking market or anywhere?

Over the next 12 months to grow deposits?

Just curious, John, what did you, the last Company, back, that you have national healthcare, what did that trade for as a percentage of book and earnings if you don't mind just a historical fact?

And what are you seeing, if you can, what are you seeing out there in the M&A environment?

I will answer your last question, Bruce because it was directed to me, and I won't have a very good answer, and it will give Tad time to think of a very good answer for your first part of your question.

So, with the multiple of earnings that my last company traded at, I honestly don't remember, because it was, at this point 12 or 13 years ago.

Multiple to book, I think, we sold the business for 2.5 times the book value to Heller Financial and it traded at multiples higher than that and lower than that at different times.

So, that was the final multiple.

The business generated the mid-teens ROE so we can do the math on the PE there.

So that's a specific answer to your question.

I think generally speaking, the environment for M&A, I would probably describe as people are still very cautious other than doing deals that are very much fit in acquisitions and footprints they're trying to fill out or deals that they view as assisted or highly attractive from a financial perspective.

But it is generally still cautious on what I consider larger strategic M&A.

I would expect that to change though, as we continue to transition from a world that was shocked to a world that is feeling more normal.

Obviously, the business is changing quite a bit.

There's a lot of very large drivers going on.

They're changing the landscape.

Deleveraging and shortages of assets and shift from non-banks to banks, et cetera.

So, not particularly well crafted answer there but those are my high-level views.Now, Tad can give you a very well crafted answer to your first few questions?

Tad?

Thanks.

Bruce, there was a series of questions there.

Let me start with the M&A question, that is, we don't expect to do any M&As this year.

We don't expect be eligible to do M&A, absent a charter change.

We think the charter change will occur late in the year which would then allow us to talk about different retail strategies.

But for this year, we don't need to do an M&A to raise the deposits that we need, and absent some major change in interest rates, we think we can raise deposits not only cheaply from an interest expense, but cheaply from an OpEx.

So we really have our hands full for 2011, if we execute on the strategy that we laid out and can get an ROA of 1.5% with the operating structure that we have now, we can look towards 2012 to expand those products and services and see what that new charter might bring us.

We really think that we can achieve our targets in 2011 absent of any of those changes.

Okay.

Thanks.

Thank you everyone.

Just a reminder, that the replay of this call be available later today.

Thank you for listening.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.