PacWest Bancorp (PACW) 2011 Q1 法說會逐字稿

Good morning, and welcome to the CapitalSource, Incorporated first-quarter 2011 conference call and webcast.

All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note this event is being recorded.

I would like to turn the conference over to Dennis Oakes, please go ahead.

Thank you, Maureen.

Good morning, and thank you for joining the CapitalSource first-quarter 2011 earnings call.

With me is John Delaney, Executive Chairman; Co-Chief Executive Officers, Jim Pieczynski and Steve Museles; Chief Financial Officer, Don Cole; and CapitalSource Bank President and CEO, Tad Lowrey.

This is webcast live on the Company website.

A recording will be available this morning.

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

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

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

Statements made on this call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All forward-looking statements, including statements regarding future financial operating results, involve risks, uncertainties and contingencies, many of which are beyond the control of CapitalSource, and which may cause actual results to differ materially from anticipated results.

CapitalSource is under no obligation up to date 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.

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

John will begin the prepared portion, after Don concludes his remarks we will take questions.

John?

Thanks Dennis.

2011 is off to a very solid start.

In the first quarter at CapitalSource bank, we funded over $625 million of new loans, increased profitability, improved credit performance and maintained the robust capital levels which had been in place since the bank's formation.

At the Parent we presently have over $1 billion of unrestricted cash.

With the exception of higher than expected provisioning and other cleanup items for a few loans in the legacy portfolio, our financial performance this quarter was consistent with our expectations, and in line with the full year guidance we provided on our fourth quarter call.

Over the last four quarters we have shown a strengthening balance sheet, rapidly paying down debt and accumulating significant cash.

Significantly improved credit performance, which has stabilized but continues to require modest quarterly provisioning for the legacy portfolio, steadily increasing margins and capital levels at CapitalSource Bank, and consistent profitability.

All of these developments have allow us to reorient our short-term strategic focus from a defensive stance, to an intensive proactive and forward looking effort to both fund new loans and improve its profitability.

We have two strategic priorities at the company.

Which are to execute on a strategy to utilize in a manner that enhances shareholder value, to significant excess capital and liquidity we accumulated at the parent, and to convert the bank to a commercial charter.

We regarding the latter we began our pursuit of bank holding company status earlier this year, which is a path to converting the charter.

That we are required to keep the details of our interactions with the Federal Reserve staff confidential, we can report that our dialogue has resulted in a very clear understanding of the actions required for us to be considered for bank holding company.

In that regard we are now working to determine the most effective and timely steps for converting CapitalSource Bank to a commercial charter, which we believe we will ultimately accomplish.

We also remain fully committed to making prudent use of excess capital in a manner that is in the best interest of our shareholders, and do not intend to simply hold excess capital indefinitely, hoping for a big opportunity to come our way.

There are several possible strategies for deployment of excess capital that we are currently assessing, which we could pursue separately or in combination with one another.

In the short term we will remain focused on growing assets and enhancing profitability of CapitalSource Bank, with our existing platform and charter, both happen nicely this quarter.

As we assess and implement our strategic initiatives we are mindful that we need to balance our top two strategic priorities.

In doing so, it is possible that we may pursue a course that takes longer than we originally planned to convert to a commercial charter, and/or to utilize this excess capital.

Jim is up next reviewing the loan originations in the quarter.

Thank you, John, and good morning, everybody.

New loans funded in the first quarter, were $627.5 million, with production coming from several of our business groups.

The total for the quarter includes 278 million of multifamily loans, which is a higher production level than we had originally anticipated for the full year plan of our business.

With this we see a reasonable chance to exceed our original initial origination targets of $1.8 billion to $1.9 billion.

The new funded loan total for the quarter was 17% higher than it was in the fourth quarter, which is in contrast to our usual experience, where typically there are a significant amount of closings in the fourth quarter and a slow down in the first quarter.

Based on the loans we closed in April, and others we have in the pipeline or our credit review process, we are confident that the second quarter will meet run rate expectations of $400 million to $500 million which we communicated earlier.

Though the largest concentration of new loans was multifamily, our timeshare receivables and equipment finance businesses were also significant contributors.

The value of our diverse group of origination teams was evidenced, once again, which as a different group, has had the highest level of originations in each of the last five quarters.

Also, as discussed on our earnings call last quarter, we continued to expect average contractual yield to tighten a bit during the course of this year, due to a combination of increasing competition and the on-going shift of our total portfolio to a higher overall percentage of relatively lower yielding, small business, multifamily, and equipment finance loans.

Multifamily and SBA loans in this quarter, for example, accounted for 47% of the total loan production, and had average all-in yield of 5.42%.

The 6.96% blended yield on the remainder of the loans originated in the first quarter, was consistent with our expectations.

It's also important to remember that both the multifamily loans, and the guaranteed portion of the SBA loans, provide solid returns on equity due to the lower capital requirements required by the banking regulators.

As I mentioned on the fourth quarter call, roughly 25% to 30% of our total originations in 2010 were purchase loans, and we expect that approximate level will be similar for 2011.

The ability to make portfolio purchases at attractive prices has several advantages.

Though we underwrite each individual loan in a multi-loan portfolio the same way we do for those loans we originate directly, there are certain economies of scale that accrue with portfolio acquisitions.

We are also buying more seasoned loans, which generally reduces credit risk.

And in many instances, we are establishing new business relationships with borrowers who are quite likely to have financing needs in the future.

As an example, we acquired a timeshare receivables portfolio in the first quarter, which account ted for $135 million, of the new loan funding, but also added 24 new customers in what has been a very stable business for CapitalSource.

We are very happy with the depth and breadth of our current national lending franchise, which we consider among our most valuable assets and our greatest competitive advantage.

We will continue to evaluate opportunities to expand our existing originations platform.

However, if we have the opportunity to acquire new teams, which are capable of originating, underwriting and servicing loans in specialty areas, which would be complimentary to our core competencies, and consistent with our bank regulatory frame work.

As Tad will now discuss, the first quarter at CapitalSource Bank was one of continued solid progress on a number of fronts.

Tad?

Thanks, Jim.

Good morning everyone.

I actually have quite a bit of good news to report this morning about the performance of CapitalSource Bank in our first quarter.

The substantial level of new loan production, that Jim has mentioned, resulted in net loan growth of $164 million, or 4.3%.

We also had loan repayments in the quarter that were above our expectations, primarily due to $265 million in pre-payments.

A significant portion of these repayments were legacy loans held by the bank, which reduces our legacy loan balance to 31% of our total loans at quarter end.

As a result of the fourth quarter and the first quarter, we now expect a higher level of loan repayments to occur for the remainder of this year, and revised our full-year net loan growth target to 10% to 15%.

And that's assuming another $1.4 billion to $1.6 billion of loan repayments for 2011.

Net interest income increased by 7%, to $77 million.

Our net interest margin expanded by 39 basis points, and our pre-tax, pre-provision operating earnings continued to increase.

Our capital levels continued to climb, with our risk-based capital now at 18.8%, and a 13.5% leverage ratio.

As a result, we continue to be extremely well capitalized, both on absolute basis, and relative to all industry benchmarks.

Our total assets increased slight, by $63 million, and now stand at $6.2 billion, and represent two-thirds of total CapitalSource assets.

The high level of loan pre-payments in the quarter had the effect of increasing our pre-tax, pre-provision income, and our net interest margin, due to increased loan discount accretion and deferred fee recognition.

Non-accruals also declined significantly in the quarter, which also positively impacted these measures.

Because the factors are unlikely to combine with such magnitude, for the remainder of the year, we expect the net interest margin will gravitate towards the 5% level over the remainder of 2011.

Credit performance at the bank was another very good story.

Our loan loss provision was consistent with the prior quarter, at $11 million as we added a net $8 million to the total reserves.

Net charge offs were only $3 million, after a recovery of $11.4 million on a real estate loan, where the underlying property was sold, and we were paid off.

Our allowance for loan losses, as a percentage of non-accruals, increased from 50% in the prior quarter, to 76% in this quarter, and MPA's a percentage of total assets declined 5.4%, to 5%.

As we have said in the past, we don't suggest focusing on delinquencies as a barometer of our future credit performance, but both the short term and 90 plus day delinquencies also declined in the quarter.

Non-accruals are the metric we view as the best guide of overall credit performance in the Bank, and those declined by 30% to $175 million.

In addition there were only 200,000 of new non-accruals in the quarter.

Turning to the funding.

Despite an average funding cost of under 1% for new CD's that we added, we still had a net inflow of $87 million, which raised our total deposits by 2%, to $4.7 billion.

The net loan growth allowed us to redeploy some of our lower yielding cash and investments, but we still we have roughly $2 billion of liquidity, 32% of our balance sheet.

With that strong liquidity position, we don't have a need to raise short term deposits, but we intend to continue doing so this quarter, and the remainder of 2011, in order to take further advantage of low-interest rates and extend our duration.

The same 21 branches that we operate today had over $8 billion of deposits in 2007, so we continue to be confident of our ability to fund needed growth over the next 12 to 24 months, continuing with our existing deposit products and our industrial charter.

Don will now provide his view of the quarter from a Parent Company and consolidated perspective.

Thank you, Tad.

Good morning everyone.

The runoff activities of the Parent Company, and the credit performance of the legacy loans held at the Parent, are reflected in our other commercial finance segment.

We expected the segment to run at roughly break even during 2011, allowing our consolidated results to highlight the earnings power of CapitalSource Bank, as Tad just described.

Unfortunately, legacy loan credit charges in the first quarter offset bank and earnings resulted in lower than anticipated net income.

We had a net loss of $35 million, or $0.11 per diluted share, for the other commercial finance segment, which was driven by the following factors.

The most significant drag on earnings was quarterly provision of $34 million, largely the result of the deterioration of four legacy cash flow loans, that were previously identified as problem assets, and marked as impaired during 2010 or before.

The largest provision was approximately $21 million for a cash flow loan to apparel business, which was written down to liquidation value.

Two of the other high provision problem loans were similarly to companys in the consumer products and services spaces.

Though disappointingly high, these provisions reflect the lingering reality of the recession for businesses, whose revenues have fallen short of expectations.

We are encouraged, however, by the significant reduction this quarter in new problem loans, and the improvement in many of our credit metrics, which I will discuss in detail shortly.

We also had tax expense in the quarter, despite the planned consolidation of taxpayer entities, which will result in the elimination of cash federal tax payments.

I will explain taxes in greater detail in a moment.

On the plus side, in the other commercial finance segment this quarter, we had investment gains of $22.3 million, which was $14.5 million higher than the prior quarter.

Included in that total were gains of $9.8 million on the sale of cost-based investments, primarily in our European portfolio, and the sale of a portion of the bonds we retained upon deconsolidation of the 2006-A securitization.

We sold a $50 million face amount of those bonds, less than half of our remaining position, and recorded a gain of $13.3 million based on our December 31, 2010 marks.

We continue to own $71 million face value of those bonds, which increased in value on our balance sheet by another $8.3 million during the quarter.

This $21.6 million increase in the value of the 2006-A bonds we sold, or still hold, is consistent with the improving credit performance we have seen in our remaining legacy commercial real estate portfolio, and similarly consistent with our view during 2010 that some portions of our portfolio would ultimately perform better than our reserves then indicated.

We also had a decline of nearly $10 million in REO expense, to $7.3 million in the quarter.

Our remaining Parent REO balance now totals only $41 million, and we are actively working to reduce that amount each quarter.

Finally, other income in the Parent was $18.7 million in the first quarter, compared to $2.4 million the prior quarter.

Other income was significantly lower last quarter due to large losses on portfolio sales, including the European portfolio, which we did not experience this quarter.

I will turn now to the balance sheet.

We continue to reduce Parent Company debt during the quarter ,and more than doubled our cash position at the Parent since December 31, 2010.

We also fully paid off the aggregate principal balances, and subsequently terminated the CS3, CS7 and CS Europe credit facilities during the quarter.

Earlier this month we terminated the syndicated bank credit facility, which had a zero balance at March 31.

With those actions, after adjusting for the Genesis repayment ,we now have roughly $850 million of Parent Company loans with no credit facility debt associated with them, which means that all future interest and principal payments collected on those loans will add to Parent liquidity.

Our term securitizations continued to pay down fairly rapidly as well, with approximately $115 million of collections in the first quarter, reducing third party debt by nearly 17% to $577 million.

Our net equity in the four remaining securitizations was approximately $296 million at quarter end.

Our Parent liquidity increased to $723 million at the end of the first quarter, and one day later jumped to $1 billion when we received the Genesis loan pay-off on April 1st.

As John indicated, determining the course of action which will result in the most prudent deployment of our excess capital and liquidity is top priority for senior management and our board.

Remembering however, we do have a debt payment of $281 million scheduled early in the third quarter, when the 3.5% and 4% convertible debentures are puttable.

As I mentioned at the outset.

Loan loss provision was higher than expected at the Parent, primarily due to deterioration on a few impaired legacy cash flow loans.

Our overall credit picture on a consolidated basis has steadily improved over the last year, however, and the first quarter metrics reflect that progress.

Delinquencies, non-accruals and impairments were all lower in the quarter.

Non-accruals declined on an absolute basis by $149 million, and as a percentage of total loans were 9% at March 31, compared to 11% at the end of the prior quarter.

The decrease was driven primarily by loans which paid off, were sold, or charged-off in the quarter.

Very importantly, new non-accruals declined significantly from the prior quarter level of $111 million, to $24 million in the first quarter.

It is also helpful to understand the progress we have made in reducing our exposure to large legacy cash flow loans, which have been the greatest contribute to our cash flow loan loss provisions in recent quarters.

At the end of 2008, we had 45 cash flow borrowers, with aggregate net balances greater than $20 million, and our total cash flow exposure to these borrowers was $1.15 billion.

Including loans that have paid off through today, that number is down to 9 borrowers and $237 million of aggregate cash flow exposure, for a decrease of nearly 80%.

This experience is similar to the reduction we described in our real estate book a couple of quarters ago.

That real estate reduction has resulted in significantly lower charge offs in that portfolio over the last two quarters, and we would expect to see similar results in the cash flow portfolio going forward.

Before taking questions, I want to review our anticipated tax situation for 2011, in the context of the DTA valuation, which was $457 million at the end of the first quarter.

As we have indicated previously, we are eligible to file a consolidated US tax return this year, which means that losses from certain of our entities can offset income at other profitable entities, principally CapitalSource Bank.

The very important result is that for the foreseeable future we expect to pay little or no US Federal income tax.

Unfortunately, from a GAAP perspective, our tax items continue to demonstrate complexity created by our termination of REET status at the end of 2008.

You will note from our consolidated income statement, that we recorded $11.2 million of tax expense during the quarter, that we previously indicated an expectation that this number would be closer to zero.

The difference was caused by a GAAP rule that required us to reestablish evaluation allowance, against the portion of the bank's DTA that had been unreserved when the bank was a stand alone taxpayer.

It is once again important to note, that this is simply a GAAP adjustment, and in no way reflects upon our ability to use tax assets against future taxable income.

For those of you looking to assess the DTA impact for the remainder of the year, our current expectation is that we will record a similar level of tax expense in the second quarter, but return to a level of approximately zero for the third and fourth quarters.

Other than this change to 2011 tax expense in the fist and second quarters, our view related to the DTA remains consistent with the discussion on our fourth quarter call.

I will refrain from repeating that view today, but would be happy to discuss it further if anyone has a question.

With that, Operator, we are now ready to take questions.

Thank you.

(Operator Instructions) John Stilmar, SunTrust.

Maybe we could start with the commentary with regards to the progress that you've had with the regulators in conversations.

My question is, what has changed this quarter versus last quarter?

Has it been a better understanding -- is it procedural?

Have there been questions that have been raised?

I was wondering if you could characterize, while you can't really disclose the details, what's really changed this quarter versus last quarter?

This is Steve, John.

We've spent a fair amount of time with the Fed in discussions in their offices, and they've given us a fairly detailed, and I would say somewhat lengthy list of things that we have to do, actions we have to take, in order to be considered for bank holding company.

We can take certain actions to accelerate that process, and make it happen faster, but as John said, we need to balance taking those actions versus what is in the best interest of our stockholders.

So, we're going to take the time to think about how to proceed.

I don't know if anything has changed; it's just that we've gotten more of a complete list of what needs to be done.

One simple way of thinking about it is, the parent company is a certain size.

I would say that to accelerate bank holding company, and -- so let's analyze the parent company for a second; it has a certain size and has a lot of excess capital.

Ideally, what we'd like to do with the parent company is, pay out a lot of that excess capital to shareholders, right, while simultaneously becoming bank holding company.

I think it's fair to say that if we wanted to kind of optimize our positioning of the Company to receive bank holding company in an accelerated fashion, it would be kind of optimal if the parent company were smaller, and the return of capital to the shareholders was slower.

Right?

So, what we are balancing is a way of accomplishing all those objectives, which is to obtain bank holding company as quickly as possible, without necessarily having to radically shrink the parent, which could come with cost to the shareholders, or without having to radically change our plans to get a lot of this excess capital back to the shareholders.

Is it fair, then, to think about the -- that the liquidity and capital levels that the regulators now require at the parent company are probably a little bit higher than what you thought previously, and that has caused you to kind of go back to the drawing board with regards to balancing time and capital --

No.

That is not an accurate statement.

I would say, the liquidity levels at the parent and capital levels with the parent are widely acknowledged to be above standard, if you will.

It's really not about liquidity and capital at the parent.

I mean, as a practical matter, the parent almost has 100% capital.

If you take the excess liquidity we have the parent and apply it against the recourse debt, and you assume the equity and the securitizations is equity and securitizations, the parent is effectively a 100% capital business.

So, it's not really about capital, and it's not really about liquidity, because the parent clearly has abundant liquidity and it has abundant capital.

I would say it's about size, ratios -- optically, is it appropriately to be returning a lot of capital to shareholders while you're pursuing bank holding company?

It's things like that, as well as a long list of procedural stuff.

I don't want you to think that we don't believe there's a path for choosing these things.

What I would like you to hear from us is that what we are, in fact, doing, which is looking at these two priorities we have, which is getting bank holding company as fast as possible, which really means converting the charter as fast as possible, and getting this excess capital back to the shareholders.

Both of those things, we think, are important, and create shareholder value, and we're trying to figure out the way of accomplishing both in an optimal way, as opposed to being forced to thinking about them sequentially, if you know what I mean.

I do.

Much more clear.

Secondly, with regards to -- or just touching on credit; it looked like on a dollar basis, we saw an increase in nonaccrual in the 30- to 89-day bucket as well as in the 30- to 89-bucket of delinquencies.

You highlighted that those were sort of cash flow loans that were related to apparel or similar industries.

Was wondering if you could -- as you think about the portfolio and as we are now into the second quarter as well, is this sort of a one time in nature, the bumpness and lumpness of your portfolio, or are there several other loans getting close to the status of -- I'm just trying to get a sense for the pace of new inflows, which seemed to tick up a little bit.

Is this the reality of the business, or are we starting to see a little bit of inflection in your other portfolio companies that we might think about in sequential quarters to manage expectations in our model?

What I would say about that, I think you were looking at one of the tables that shows the way the problem assets are broken out, I don't know I pay that much attention to where the nonaccruals flow through delinquencies; I think ultimately, nonaccruals will likely get there.

I look more at the level of nonaccruals and the pace of new nonaccruals, both of which were down significantly this quarter.

We mentioned, I think, that the new nonaccruals are only $24 million, versus $111 million in the prior quarter.

I think the other key fact that I see when I look at the portfolio, why I mentioned about the shrinkage of the large exposure cash flow portfolio, which is down 80% over the last couple of years, which is where most of these large provisions have come from, largely in the last 2 quarters, and I tried to reference back, if you think back to the commentary we had last summer when we were having the outsized provisions on our real estate book, and we looked at that and said we had, at one point, 25 real estate loans over $25 million, we're down to about 3, and that's played itself out.

If you look at where credit charges and charge-offs are over the last 2 quarters, the real estate is really significantly come down.

So, my view is I expect the cash flow portfolio to follow similarly, in that we have taken the hits on the bigger cash flow loans and we've worked to bring the exposures down.

I don't think I would say that's the reality going forward; I would say honestly we were disappointed by the level of the credit provisions this quarter, and we would expect them to reduce here afterwards.

Okay.

Perfect.

Finally, with regards to taxes, and I apologize for my lack of knowledge here.

Can you refresh me -- refresh my understanding; significant deferred tax asset, you have a huge valuation allowance that's almost 100% of that, and can you maybe articulate, again, the accounting versus the cash flow?

You clearly said you are not paying any cash taxes.

Is this just a GAAP reconciliation, the path to undoing the valuation allowance DTA in such that we can -- what's the path to visibility towards book value growth from -- that we can see from the DTA?

I was wondering if you could refresh our understanding of where we are today.

First, on this matter, no apology is necessary, and second, I would say, yes; it's largely a GAAP issue.

As I did indicate, we expect to pay no Federal US income taxes, and that will manifest itself here in the first quarter; the Bank had Federal taxable income, and it won't make an estimate tax payment.

Ultimately, the Bank will make its tax payment to the parent, as it utilizes its parent's actual tax attributes; actual NOLs and losses.

When it comes to DTA's and the GAAP rules, as we said in the past, we are in the valuation allowance position because of the trailing 12-quarter losses, that up to this point had been in all the various entities, but now we look at them on a consolidated basis, because we are in this consolidated tax filing period.

So our consolidated entities have this trailing 12-quarter loss situation, which is leading us to put up a essentially a valuation allowance on almost all of our DTA's.

We had a little noise this quarter where, because when the bank was a stand-alone, it didn't have to have this valuation allowance, but now that it's part of a consolidated group, it has started to put some back, and again, it will put more back next quarter.

But, ultimately, the path to book value accretion from that is, we will, as we go forward, when we are pre tax profitable in the future quarters, we'll have some benefit of that from not actually recording GAAP taxes, as I mentioned in the third and fourth quarters, but ultimately, we'll need to get to a situation where we've established a level of profitability such that the GAAP rules allow us to your our future forecasted income, which is very evident today from looking at our bank performance, but we will be able to use that future forecasted income as anticipated use of those DTA's.

When that time happens, a very large chunk of that DTA will reverse, in one period likely, right into book value, right through the income statement, as a tax benefit.

We mentioned in the prior quarter that some portion of that DTA or the DTA attributes as it stands today, is capital in nature, so it won't all likely reverse until such time as we have visibility about capital gains.

I will mention that the '06 a bonds we sold at a gain this time were portion of capital gains, so that helps in that regard, but some portion will be capital gains, which will lead to not reversing at the first instance.

I think, as we said before, that's more of a 15% to 20% part of what was then there, about $100 million, I think in total, and again, has come down a little bit because of the '06-a gains.

Largely, we'll have a very large book value accretion at the time that we are able to reverse the significant portion of DTAs, which, again, we said we don't expect to be until, at the earliest, the end of this year, as we said at the end of the last quarter.

Thank you, gentlemen.

Scott Valentin, FBR.

On bank holding company versus the return of capital question.

Trying to get a sense of what kind of return the bank holding company status will provide.

Is it in terms of better deposit mix, ultimately?

Is it bank acquisition?

Is it just the bank holding company status affording a higher valuation to the company than an ILC charter would, versus -- I think investors are hoping or expecting a billion dollars of liquidity to holding company, the ability to return capital and drive returns through buying back stock, retiring debt, whatever it may be.

Trying to get a sense of how you balance the two as you think about bank holding company status, what kind of ultimate return you can get of bank holding company versus returning capital today.

It's a really good question, and it's in part a really good question, because it's exactly the issue we are wrestling with now, Scott.

I think you inventoried things very well there in terms of the attributes of the 2 different priorities.

Ideally, you wouldn't have to try to balance these things; you'd just plow ahead with both of them.

Converting the bank to a commercial charter, which is really the objective here, has certain benefits which you outlined.

You are more in the game for bank acquisitions, which is a real, tangible benefit, that is kind of option value, in a way, right, because it's not like we have any bank acquisitions lined up, but it puts us in a position to do that, so there's option value associated with that.

It also has some of the optical benefits that you are focused on, which we're not weighing all that heavily, but there is a much larger universe of banks that are commercial banks versus what we have, which is an ILC.

It looks like commercial bank because it's fully branched and there's no broker deposits, but it still has a small asterisks next to it, so eliminating that asterisk has value.

But it really is the optionality around being able to do more things with the charter in terms of acquisitions, and then on a real long-term basis, being able to start offering other products to the capital source, lending customers, et cetera.

So there's clearly value there, and its clearly important thing for us to do, and we're completely confident we'll get there.

The excess capital to the shareholders is obviously a much more tangible thing to be focused on, because if you look at the capital levels and the liquidity levels at the parent, there is clearly money there that we're not putting to good use right now, because we are not investing or lending at the parent, and the bank is -- it's capital levels keep growing, so it's not apparent to the bank ever needs any of that capital.

Figuring out what to do with the capital and liquidity at the parent -- because there's two things there; there's liquidity, right, which can be applied against the debt the parent has, et cetera, which is somewhat of an obvious thing to do at some point, and then what to do with the excess capital, which is really in terms of it getting back to the shareholders is a very high priority.

I wish we could say, right now how we have, in fact, balanced that, and what the road map is.

You would expect we're trying to come up with a solution that allows us to do both as quickly as possible, and perhaps simultaneously, and if not, a solution that does them sequentially in a way that accelerates both of them as fast as possible.

Tad, you want to comment on the benefits of converting the charter?

Yes.

I thought Scott did an excellent job and you closed it.

The only thing I would add to all this is that at the bank, we view the conversion of the charter as something that will happen, that the timing is not that significant to our earnings stream, particularly in the short run.

For the rest of this year, and even for next year, continuing with the existing business model, looks like we can continue to generate earnings faster than we can grow the balance sheet.

I appreciate the detailed response.

Steve, you gave guidance for Q2 loan production within the $400 million to $500 million range.

The first quarter seasonally usually the slower quarter, typically, did $627 million, of course there was a bulk portfolio purchase in there of $135 million.

Is that $400 million to $500 million being conservative, or have you seen a slowdown in the pace or is it seeing fewer opportunities for portfolio purchase in the second quarter?

This is JIm.

I think the $400 million to $500 million is what we have communicated and that's based on internal projections, bringing it up from all the groups for the rest of the year.

I think when you look at the first quarter, the first quarter was an upside surprise where we thought the 4 to 500, but we had a lot of things hitting on all cylinders that put us the position to have a very solid quarter.

When we are looking at what do we expect for the rest of the year, we are saying we did have this one time nice bump in the first quarter that we don't view as a trend for the rest of the year, but we are comfortable with the $400 million to $500 million that we've communicated earlier.

So that's why, when we sitting there saying where will we be, we had previously given guidance of $1.8 billion to $1.9 billion of new originations based on the upside in the first quarter, we expect to be above that going forward.

Okay.

Thanks very much.

Steve Alexopoulos, JPMorgan.

Maybe I'll start to followup on the discussion on capital; could you just run through while you are waiting for the bank charter, what strategies, I thought you said in your opening comments, you were considering strategies to deploy capital.

What are you thinking about?

Is it special dividends, is it buy backs.

Can you talk about how you are thinking about that while you wait for the charter?

The broad category of things you do is buy backs, dividends, distributions, special dividends, kind of all of the above of the broad categories that we would consider.

I don't think we can say specifically other than the buy back we've announced so far.

Yes, we have a buy back in place, obviously.

I think the key point John was making earlier was the balancing portion of this, but there's not a lot of other magic to the list that John gave.

I think the only other option that he even discussed previously is we aren't at this point making new loans out of our parent.

Those are really our list of options.

Okay.

On the $627 million of new loans funded in the quarter, how much of that was from portfolio purchases?

How did purchases compare to last quarter?

I think in the first quarter, we talked about the timeshare portfolio purchase, which was $135 million, and then the multi-family, if you look at that, the total originations on the multi-family side were $287 million in the first quarter, and included in there was a large portfolio purchase of approximately $180 million.

The way we look at it is the multi-family allotted -- although we have origination program with respect to the multi-family, we've also been able to acquire and get significant amount of our growth in that portfolio is through portfolio acquisitions.

If you look at that first quarter, it's that timeshare, we had one timeshare portfolio purchase, and the one multi-family purchase.

Okay.

Maybe just one final question.

A lot of banks this quarter talked about competitive environment for loans reaching what they are calling a frothy level, given where liquidiy capital is in the industry; they're already seeing covenant-light loans out there.

Can you talk about what you are seeing in the quarter from a pricing and covenant perspective?

That's a really good question.

I would say what we are seeing and where we are seeing the largest level of competition right now is in the leverage finance, i.e., the cash flow business.

You are right, you are seeing kind of things we are seeing in that space is a reduction of [labor] floors, a lowering of the spread, covenant light, and lack of any kind of prepayment penalties.

What we found is that's probably the most competitive area right now.

We didn't do anything in the general cash flow space at all during the quarter and it was largely because of what you are seeing there, we did, between our technology, between our other cash flow businesses, we had roughly $80 million that was spread between our healthcare, security and technology portfolios.

You are seeing just, quite frankly, it's just become competitive, and as a result, we expect to have lower production in that area because of that.

But that clearly has become a more competitive space for us.

Okay.

Thanks for the color.

Moshe Orenbuch, Credit Suisse.

Given the importance of leveraging up the capital at the bank, can you talk a little bit about the portfolios that you did buy, what kinds of things made those more attractive than the others, and what other things are out there and potential for larger portfolio purchases?

I assume your origination guidance doesn't include large portfolio purchases.

Focusing on what we did in the first quarter, the timeshare portfolio that we acquired was exciting acquisition for us because of the fact that it brought us 24 new borrowers, and the nice part about the timeshare portfolio is that you have that starts out as a revolving facility that ramps up and hyperamortizes down; that's just typically the way these are structured.

The nice part about this portfolio is now that we have these loans, it gives us the ability to change the terms of those deals going forward and not have them hyperamortize down, but rather work a deal with the borrower to allow the revolving component to stay out.

So as opposed to having a loan on the books for 1 or 2 years, you can extend this out and make it a 3- to 5-year deal.

We view that as a very, very opportunistic acquisition that gives us access to borrowers that we ordinarily would not have and the timeshare space has been one of our high points for the last several quarters and we think there is a lot of opportunity there.

On the multi-family side, we have looked at portfolio acquisitions as a way of growing that and a lot of that has been a function of where you have banks to the extent that they are capital challenged and do need to get rid of loans.

The easiest ones for them to sell are the multi-family, which have a little bit of a commodity-like nature associated with them.

They typically can sell those at or slightly below par and not take a big capital hit.

The opportunities that arise on the multi-family side are a function of other institutions that, because of the capital constraints, need to dispose of some of their portfolio.

That's where we are picking up loans in that space.

Could you address the question of are there size limitations, either in terms of the sellers or your appetite or size parameters we should be thinking about?

No.

I wouldn't say there are size limitations.

When you look at the -- if you focus on the bank's excess liquidity right now, the bank has the ability to take on a very large portfolio.

If you look at what we projected during the year, $1.8 billion to $1.9 billion, just on the capital availability that the bank has right now, we could do a billion dollars over and above that from a capital perspective and still be within the required tolerances that we need to be for capital.

So there is no limitation from that perspective.

When we look at hold limits, we think of hold limits as it relates to a individual loan.

For example in the multi-family, obviously there was a significant amount of loans associated with that, and the same was true for the timeshare portfolio.

The answer is, no.

We don't view size limitation as a gating issue for us.

On a separate matter, we got a note from our healthcare team yesterday talking about some potential changes in reimbursements for skilled nursing facilities; one alternative being a small increase and the other a sharp decrease.

Is this something you are looking at, to you have a perspective on whether that has an impact going forward?

Yes, we do look at that and track that closely.

It was a unique kind of guidance that came out, which is we are considering a 1.5% net increase in reimbursement or an 11.5% reduction.

It's a wide range and that's part of the regulatory framework that healthcare facilities are operating in, the range that's always going to be there.

The one thing that I would say, though, is that relates to the Medicare side of the business, and if you look at our skilled nursing loan portfolio, largely that typically represents 15% to 20% of the revenues at the facilities on which we have loans, and a lot of the revenue there is Medicaid-driven revenue.

So this change that everybody is kind of worried a little bit about now, we obviously have to study it and have to look at it, but the reality is even if you do have a slight change of reimbursement, given where we are at in term of debt service coverage, fixed charge coverage and loan relative to the level of EBITDA, we ultimately will feel fine with it.

Obviously it's new, what was proposed yesterday, so we have not done hard core analysis yet.

But just looking at it and where we are at, we feel comfortable with where we are at in the portfolio, and the long-term care, business in general, has been very, very solid lately, as evidence by the pay off of the Genesis loan that we had.

We feel very good about the space, our portfolio has been very solid, but naturally, we will need to look at the reimbursement impacts.

Thanks.

John Hecht, JMP Securities.

First one, not to beat a dead horse, but going back to the bank holding charter status.

You guys now have a list, it seems, of to-do actions.

Can you give us a sense, based on perspective, what type of delay in terms of timing that that might take to accomplish?

Second, is there anything on that list that causes you to pause to say maybe the bank holding company status isn't optimal, given the excess liquidity and current framework?

I don't think there is any surprises on there.

I think -- put yourself in the Fed's shoes for a second.

They haven't made a new bank holding company for quite a long time, other than in connection with distressed bank acquisitions.

There's a lot of new regulation and guidance that's come out.

I think they are looking at CapitalSource almost like a test case, kind of the first new bank holding company with any level of complexity and activities of the parents that they're considering.

The standard is high; I guess I would acknowledge perhaps a little higher than we initially thought.

That's why we think it may take a little bit more time.

It's hard to put a guess on how much time that would take.

As I said earlier, there are certain things we could do to accelerate that time, but again, it gets back to the balancing that John was discussing.

I would like to say we could do it in a year, or by the end of this year, depending on the actions we take.

It's not something I'm comfortable at guessing at right now.

John or Tad, you may want to add something to that.

I think we are confident -- our confidence in getting it is not at issue; it's just a question of to meet the end of the year timeline we'd have to do some things that would be painful.

It's not clear that those things make sense.

As we said, balancing this in a way to accomplish our other strategic priorities for the company, also moving the conversion of the charter along as quickly as possible is what we are doing.

That's not as direct an answer as you would like, John but it's actually the truth in terms of how we are trying to make this decision.

I appreciate that.

It seems logical.

Second, I appreciate that color.

The second --

For example, I will give you extreme example.

If we sold every asset at the parent, we would be a bank holding company almost immediately.

We don't -- that's not as extreme as we -- that's an extreme example.

We don't have to do that.

I'm trying to give you dimension of the considerations here.

Those are the things we are kind of wrestling with.

I understand it given the context of the solid current growth at the bank and net income growth that you don't need to rush to do anything, so I appreciate --

The bank is doing great and there is not any dispute of anything.

Steve made a very good point that I think is important and I think it puts everything in context.

Other than the overnight deals that were done a few years ago , the only bank holding companies created really since then have been ones created as part of an assisted transaction.

There haven't been a lot of business-as-usual bank holding companies created, if any.

The regulator's model for new bank holding companies is a high standard and a standard more around not wanting significant activities at a parent.

We have a pretty big parent and lots of stuff going on.

All that stuff has to be done to bank standards from a procedural standpoint, and all the ratios and metrics have to be what would be considered kind of top performing levels.

So those are the things -- we could pull levers to make that happen quickly, but it might delay other priorities.

Tad, if you want to add anything to

No, there is nothing I could add.

I think you covered the whole waterfront there.

Appreciate that, guys.

Second question is to Tad.

You had a certainly better than expected margin jump in Q1, and you intimated that it would normalize in the coming quarters.

Is that because you expect prepayment activity to normalize and or can you shed a light on what is happening in the core margin x prepayment fee income?

It's primarily the former, and that is, we had prepayments much higher than we expected.

But getting back to Jim's point on the competition, when you have a competitive market like that, someone described it as frothy, you look at where they are coming from, and we're not participating in that market in the cash flow space, so as a result, a lot of prepayments are in the cash flow space.

And these are loans with pretty good yields.

In the one time we are getting huge amounts of discount recognition and fee income recognition.

We're estimating that as the main change going forward.

As these higher interest rate loans prepay and we build the portfolio with lower interest loans, we see the margin declining there.

We don't see anything on the cost of funds side unless interest rates change.

The main driver would be the lack of the prepayment income.

If that stops, it means the prepayments would stop as well and better loan growth and the shrinking margin as a result of adding multi-family and SBA loans, and new loans at current market rates will cause some minor compression but the bulk of it is the one timers.

Okay.

Mike Taiano, Sandler O'Neil.

Hi, a couple of questions on the loan growth.

Tad, I thought you said, maybe it wasn't clear, did your lower the 10 to 15% net loan growth guidance for the full year because of the repayments?

We think we are ahead of where we thought we would be on production primarily due to the purchases, but absent the purchases we are still on target.

We see competitive factors there, but they are primarily in spaces we haven't had a lot of growth in anyway.

So we see production side of that as ahead of our original estimate but the prepayments are solely what is driving our lower expectation for portfolio growth.

So, would it not be within the 10 to 15%?

I see what you are saying.

We had a higher estimate previously.

Our current estimate is between 10, 15%.

Which we still see as a pretty healthy number in this environment.

I want to make sure I understand what the timeshare loans are.

Who are you actually lending to?

Is that to the actual consumers that are buying timeshares, or the resorts that are selling them?

That's a good question, and it's a good clarification.

Our borrowers are the timeshare operators themselves.

What happens is the way that these loans are structured is we have a loan to the timeshare operator; our loan is secured by the underlying receivables; and our loan is structured as a revolver with the borrowing base with eligibility requirements.

We don't have relationships or direct exposure to the underlying consumers to the extent anything happens with respect to that underlying loan.

That loan, if it's nonperforming, would be removed from the borrowing base, and that base has to be right sized.

So the benefit that you get in this business is, first of all, the consumer rates on those loans tend to be, they are certainly higher than the rate that we are charging our underlying borrower, so you have in addition to the over-collateralization feature associated with the underlying receivable, you have an additional over-collateralization feature as a function of the excess interest that is being paid on that portfolio.

So our loan is directly to the timeshare operator.

That's helpful.

What's the pricing been like on the purchased loan side?

It seems like all the commercial banks are struggling for loan growth.

Have you seen more banks looking to buy loans and, Don, could you maybe talk about the accounting.

For example, you buy them at a premium and you amortize the premium over the life of the loan.

Is that how it works?

Relative to yield, for example, if you look at the timeshare portfolio that we purchased during the first quarter, our yield on that was just under 7%.

We were at 6.85%.

That's about right for that space.

Then to answer your question with respect to when you buy a portfolio at a discount, how do you account for that.

That discount is ultimately amortized in over the life of the loan.

He asked the question about premium share.

Maybe you should clarify what we've been buying these at.

We are not paying material premiums on this, correct Jim?

We are not paying a premium.

We are buying these at par or slightly below par.

Okay.

Just a quick last one, in terms of capital deployment potential.

Could you remind me what restrictions you have with the senior secured notes right now?

Would you have to pay those down in order to initiate an increase in share buy back?

The senior secured notes have restricted payment bucket limit.

I don't have the exact number in front of me; it was around $150 million a year and grows based upon pre-tax income.

It probably grew another $7 million or $8 million this quarter.

To go over that, yes, it would require some further dealing with the senior secured note holders.

The plan we put in place for our buy back plan, with the earnings we will have over the 2-year period, there will be enough in the time range for what we originally established.

Because of the size, if you want to go above you have to deal with the note holders once again.

Great, thanks.

Don Fandetti, Citigroup.

I'm having a little trouble understanding the balancing act that you're referencing on bank holding company status.

It almost feels like there is two extremes -- you either don't go for it, or you do go for it, and it's a long and extended period where you wait for your portfolio to run off and slow sales, and if that's the case, can you really return capital in a material way in the near term?

We think we can.

There are strategies we have that allow us to do that.

We are considering the, I guess, one way of putting it is the implications of that.

I don't think it's, I think the best way to answer it is to say that I think you're framing it a little bit is a binary option, and I don't think it's quite that -- I wouldn't present it that way.

I guess the other thing, just to chime in, relative to when you are looking at I will say reducing the size of the parent, the long -- the portfolio runoff at the parent has been significant, which is what we want to happen.

If you look at our loan balance at the parent dropped from $2.5 billion at the beginning of the quarter to $2.1 billion at the end of the quarter.

That portfolio is declining quickly, which is exactly the path that we are on.

I think there is a lot of natural runoff associated with it, and the question is, do we or don't we have unnatural run off, and do we make that happen?

Just as a reminder, obviously with Genesis, we go below $1.8 billion when the Genesis path hit on April 1.

Making sure that we've got all the stress tests, documented to show that we can balance the things we want to do in terms of returning excess capital is the important consideration.

Is there a reason why you haven't been more aggressive buying stock back?

I would say, on the stock buy back, when we announced the plan, we indicated to people we weren't going to talk about the levels from an economic basis in terms of when we would be buying back stock.

The two things we look at in terms of buying back stock are, one, is it within the internal economic guidelines we have in terms of when we buy back stock.

And two, there is a whole bunch of relative blackout periods and other restrictions.

So I would say in the first quarter those things didn't intersect in a way that allowed us to do any significant stock buy back.

As we've said in the past, we don't want to talk specifically about when we will be buying back stock, but two things have to line up.

One, it has to be at a price we deem appropriate for the buy back plan; and two, depending on things going on at the company there is blackout periods, and et cetera.

Bob Napoli, Piper Jaffray.

Question on -- you guys went through a process of having people look at your company and one of the -- with a lot of banks struggling to raise to grow loans, you guys have this niche lending business.

I was wondering if you could go through and -- which of your lending products you feel you have a real, sustainable competitive edge that would be attractive to others?

The multi-family lending doesn't seem as unique to the equipment lending group you hired you brought in is very well-regarded.

Historically healthcare has been an area that you guys certainly have had, but -- wondering if you could go through that a little bit on, it seems, obviously your deposit base is retail but it's not viewed as the highest quality deposit base, so what you are bringing to the table as an entity, and investors would be investing is your lending skill, I was wondering if you could go through that a little bit and why -- what makes you unique there and what makes it sustainable.

Jim, why don't I start quickly and turn it over to you.

Yes.

I think your question kind of had two parts to it.

The first part we don't view as a relevant part.

The second part in terms of the lending portfolio, I think I will turn that over to Jim.

I think, Bob, you hit on a lot of it.

What are the specialty areas where we think we have got a good solid niche?

The healthcare area is a huge area of that.

In that niche, we have 3 components.

We have the healthcare real portfolio, healthcare cash flow lending, as well as our asset-backed, i.e., revolving lending, that's a hallmark and strength of our business since day one.

That's a great specialty area that we have.

You also touched base on the equipment finance business, which is this is a team that we brought in that has obviously hit the ground running.

I think our portfolio now is standing at roughly $260 million that that group has brought in and they started at zero a year ago.

It's a well-recognized group.

They have had a great track record.

I consider that a very strong specialty group that is -- that differentiates us.

We also have a good niche in the security business, which is the alarm monitoring business, as well as providing loans to private equity sponsors that are involved in the security business.

Again, we've got a good niche team that operates in that space.

They have been in the space for years, and I think that differentiates us.

We also have our professional practice lending group, which we brought in, which is another niche market that's out there.

The team comes with a significant level of context in the industry as well as having been focused on that space for a significant period of time.

Then, in the cash flow area, where we did differentiated is by not being a generalist that chases the big deals and buys pieces of the big deals.

We have focused on the technology, the data centers and along with the healthcare and security they mentioned previously, but that's the niche that we are in and that's the focus that we have, opposed to trying to be every to everybody, we are trying to be focused on the sponsors that we have our relationships with.

Then the rediscount business we have, I consider right now to be one of our significant gems in the portfolio.

You had a lot of people that pulled out of that space and it's a space that we have been in for a while, it's been a historic level of strength for us, and we had incredibly good credit performance in there, and we've got a great opportunity.

And then on the real estate side, we've got a team that is doing originations and has its relationships, again I know a lot of people will sit there and look at it and say, what do where you have that's different from the rest of the world?

Obviously we think the contexts we have are different.

Again, that business would probably be considered, looked at in a similar light relative to other shops.

In summary -- then the final part is our SBA group, which is we do have a national origination platform for generating SBA loans, and the nice part about the SBA loans is we are keeping everything that we originate, whereas the guaranteed portion quite frankly you could sell off at significant premium if you decided you wanted to do that.

We have chosen not to do that because we don't need the liquidity.

That's another solid souse of business for us.

So I look at the specialty niches that we have and I do think that differentiates us, whereas when you look at other baking institutions they are focused op just the CRE space, which limits their options.

Thank you.

Just to clarify, the rediscount business includes the timeshare business we talked about earlier, We are the premier lender in that space.

The other value is having all of these platforms under one roof.

They are natural platforms and diverse, just to add to what Jim said.

Thanks.

One last question.

The pace of the decline in the corporate, in the parent assets has been pretty substantial and obviously, you closed the Genesis; the Genesis loan is gone.

What do you see from here?

Do you se a much for gradual pace of decline in the parent assets from what we've seen over the last several quarters?

Or are there still opportunities to downsize that faster through loan sales and payoffs?

I think there is opportunity to continue to downsize, obviously the efforts to sell the European portfolio, that we are success in the sale of Genesis, are large chunks.

There aren't that many large chunks left out there.

There are opportunities to continue to shrink.

It's naturally continued to shrink.

Perhaps the pace will be a little slower; you won't see again these $300 million chunks of one loan, but it will continue to get smaller.

Thank you.

Joel Houck, Wells Fargo.

Can you talk about the reserve adequacy in the parent?

You've got at least this quarter reserves are 28% of [MPL] and last quarter 33%.

How do you feel about that?

Is there any part of that, that is acting as a holdup from the regulator stand point?

What have your conversations been, or what can you tell us with respect to reserve adequacy at the parent, relative to how the bank regulators look at it?

We are comfortable with our reserve levels of the bank.

The regulators, when they come in, they look at the bank side and parent side, our methodologies and the methodologies are the same.

We have not heard any kind of issues with how we approach the reserve methodologies at the parent or the bank.

I would say -- when you look at the one ratio, the reserves to MPLs, I believe, if you think about the way our credit approach worked and if loans that are seasoned, we are often going to a charge-off mode before a specific reserve mode and we have problems.

You think about our impaired book, this is across the board.

I only have the 12/31 number, but something like 40% of the impaired loans have been marked down through charge offs or specifics.

So, there's a significant amount of already charged-down amounts within the portfolio because the portfolio is a high percentage of the stressed nonaccruals much is based upon the specific charges and existing charge offs.

We feel good about where the numbers are.

I wouldn't say anything there is related to conversations with regulators; it's just our typical methodology.

Sounds like it's a size issue from a regulator standpoint than anything that you see that you guys are doing or not doing.

Yes, I think that's a fair assessment.

Okay.

Thanks, guys.

Sameer Gokhale, Keefe, Bruyette and Woods.

In terms of the provisionings at the parent and overall, you usually provide an estimate of your cumulative losses on the legacy portfolio.

I was wondering if you could just give us a sense for where you stand, if your expectations may have changed because the economy hasn't picked up as much steam as you might have thought, so where you might stand today relative to where you were before in terms of the cumulative losses on the legacy, and what the charge-offs to date have been there to help frame what we might expect going forward in terms of potential losses.

I would say our go-forward expectations haven't really changed.

When we were producing the slide, we were a little bit above the high end and would probably would still be there.

One of the reasons we stopped was related to deconsolidation of 06-a which made some of the numbers a little bit less relevant and a little more confusing.

If you think about it, I will go back to the '06a bonds we were covered $26 million on the 06a bonds if the loans were in the portfolio that would have been some reversal of the reserves.

We also seen in our real estate book, Tad mentioned a loan we got paid off on, where we had recovery of $12 million, I think we are seeing the turnaround in the cash flow book and -- I'm sorry, in the real estate book, and when we think about cash flow book we had a few outsized losses as I discussed and I gave you color on the shrinkage and the size of that portfolio especially in terms of the large credits.

That's what is what leads to our view that this was something of outlier in recent past in terms of levels of the provisions that we expected to go back down to where it was if not somewhat below, in the going-forward quarters.

That's helpful.

Thanks for clarifying.

I realize that the re-consolidation (inaudible) and I was just curious about (inaudible) the rest of the portfolio, but the color that you gave helps.

In terms of the income tax expense, and Don, you talked about the DTA a little bit, but I was trying to, I was a little confused trying to figure out during the quarter, if I were to strip out you had this valuation reversal at the bank and additional valuation allowance at the other commercial finance, on a net basis, relative to what your tax would have been, say the 40% tax rate, is it safe to say the net effect of addiional charges you took was $5.5 million dollars roughly, is that the right way to think about it?

If you are trying to do the basic math of pre-tax GAAP and tax expense, the way I think about it is this.

We had, on a consolidated basis, we effectively put up an allowance against the bank's DTA of somewhere in the $11 million range when we reconsolidated, and that was all put on our parent side.

When you look at the bank, and the reason why the bank tax expense is so low in our segment setups, the bank at the end of the year had a valuation allowance against its state DTAs that was roughly of similar size, and they were able to reverse that; we also put that back in the parent.

So the parent reversed some of or added additional valuations allowance relative to the bank's Federal and simply reversed its state, which is almost accounts for the entire amount of tax expense in the quarter versus where you might have thought we would have been around the zero percent.

That's the way I think about it.

I can't say I'm as quick as you with the math on the $5.5 million dollars.

The tax expense of the period was based upon putting up valuation allowance for the bank's Federal DTAs, that the bank as a stand-alone tax payer didn't need to have at 12/31/2010.

The amount we expect to hit in 2011, we will expect a similar amount in the second quarter, but that will be the end for the year.

It's based on a detailed model of when things reverse.

Ultimately we expect to put a similar amount in the second quarter and back to the closer zero than we would have anticipated for third and fourth quarter.

Thank you.

Has there been any further serious thought given to spinning off the parent relative to the bank, and maybe if that might help solve your ability to get some sort of regulatory approval?

You are seeking this bank hold cold status, if you have been off the hold co, there is no hold co status to seek -- is that something you are seriously considering at this point or is that something that's off the table completely?

I would say that you said two things there -- seriously considering and off the table.

I think it is certainly not off the table.

I would say we are seriously considering all options to accomplish the priorities that we outlined, and clearly the way you framed it something like what you are talk about would certainly help in balancing those two priorities.

Okay, terrific, thank you.

Henry Coffey, Sterne Agee.

In real simple terms, has anything occurred in this quarter that would roll forward the likely date of when you recapture the DTA.

What will your state taxes, what would your state taxes on a GAAP basis be per quarter if you could throw out a general number?

I would say what we said on DTA is we need a period of sustained profitability.

This profitability is not as significant as we would have forecasted coming in.

I could say that would maybe make me less bullish about a time period, although we haven't been very precise about a time period because the accounting was a little tough to predict.

I think what we have said is that we don't expect anything before the end of this year.

So depending on what happens in the next 3 quarters, we will have to see what happens.

On the net basis on the margins, slightly more conservative on that estimate.

On the second question, on our state tax expense; again, we have a lot of state NOL's for the parent company, consolidating company, but there are places where we file individually, so there are places where the bank files a separate tax return in different states and will likely have some tax expense.

It's a pretty small number, and I don't have the specific number in front of me.

My sense is that it's in the $1 million or $2 million range, but I can confirm that for you.

It's a pretty small dollar number.

Great, thank you.

This concludes our question-and-answer session, I would like to turn the conference back over to Dennis Oakes for any closing remarks.

That's it, thank you everybody, have a nice day.

The conference is now concluded.

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