PacWest Bancorp (PACW) 2012 Q1 法說會逐字稿

Good afternoon, and welcome to the CapitalSource first quarter 2012 earnings conference call.

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 now like to turn the conference over to Dennis Oakes.

Please go ahead.

Good afternoon, and thank you for joining the CapitalSource first quarter 2012 earnings call.

With me today are CapitalSource CEO, Jim Pieczynski; CapitalSource Bank CEO, Tad Lowrey; and John Bogler, our Chief Financial Officer.

This call is being webcast live on the Company website, and a recording will be available later this evening.

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

We have also posted a presentation on the website.

It provides additional detail on certain topics which will be covered during our prepared remarks, though we will not be making specific reference to the presentation.

Investors are urged to carefully read the forward-looking statements language in both our earnings release and investor presentation.

But, essentially they say the following; statements made on this call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

CapitalSource is under no obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, and we expressly disclaim any obligation to do so.

And finally, more detailed information about risks factors can be found in our reports filed with the SEC.

Jim will now begin the prepared portion of our call.

Jim?

Thank you, Dennis, and good afternoon to everyone.

Our financial results for the first quarter of 2012 represent a very solid beginning for the new year, exceeding our expectations by almost any measure.

CapitalSource Bank again demonstrated meaningful growth in both its loan portfolio and net interest income, while maintaining a strong net interest margin, and showing a consistently improving credit profile.

We are also beginning to see the early benefits of our strategy to consolidate operations entirely into CapitalSource Bank, as operating expense savings in the first quarter are consistent with our target of a 5% to 10% reduction from 2011.

We completed the move of approximately 200 employees into the bank on January 1, including all of our loan origination teams and support services.

Since the move had been contemplated and planned for some time, the integration has been extremely smooth.

During the first quarter and through this month, we have continued to return excess parent company capital to shareholders in the form of share buy-backs, purchasing an additional 19 million shares in the first quarter, and 5 million more during April.

As a result, our outstanding shares as of today are approximately 232 million, which is 28% lower than the share count of 323 million when the repurchase program began 16 months ago.

Our remaining Board authorized repurchase authority is $176 million.

An interestingly and previously unanticipated use of available liquidity occurred earlier this month, when we were approached about purchasing $25 million of the $437 million face amount of our outstanding trust preferred securities.

We completed the purchase at a significant discount to par, which will result in a gain on debt extinguishment in the second quarter.

Such opportunities may or may not present themselves again, but I wanted to highlight this potential alternative use of available liquidity.

Before turning the call over to Tad, I want to speak briefly about loan production and loan growth in the quarter.

Originations were consistent with our expectations and full-year projections, as well as being nicely spread among several of our lending groups.

Despite a higher level of loan repayments this quarter, net loan growth was 4%, or 16% on an annualized basis, which is in line with our guidance of 15% to 20% growth for the year.

New loans closed and funded were $522 million, which likewise is consistent with our full-year expectation of $2.2 billion in loan production.

As stated previously, that projection excludes any large portfolio purchases, of which there were none in the first quarter.

First-quarter production was also encouraging because the year-end push to close deals often makes the first quarter light.

By comparison, the first quarter production last year of $627 million included two large portfolio purchases, totaling $322 million.

In recent months, we have seen increasingly attractive opportunities for loan growth in commercial real estate, principally, refinancing of debt for fully cash flowing properties, and the financing of discounted payoffs on stabilized assets.

In fact, commercial real estate accounted for 30% of our first-quarter production.

Technology cash flow, lender finance, and equipment finance were also significant contributors in the quarter.

Though multi-family lending was a substantial growth area for us in 2011, we have found pricing to be overheated in recent months, and have been highly selective in new loan originations, with only $41 million in new production for the first quarter.

The diversity and geographic scope of our national lending franchise gives us the ability to pull back from areas such as multi-family, similar to what we did with general cash flow lending in the first half of 2011, while still achieving our targeted growth.

We are unwavering in our commitment to internal underwriting guidelines and return hurdles, such that we will not participate in what we view as non-economic business for the sake of portfolio growth.

We feel strongly that this is the right strategy, and that we have put in place the proper people and systems to implement it.

Tad is up next, and his remarks will focus on the first-quarter performance at CapitalSource Bank.

Tad?

Thanks, Jim.

Good afternoon, everyone.

We are very pleased with the way 2012 has begun at CapitalSource Bank.

Our total interest income increased 4% to $99 million, and the net interest margin was above our expectations at 5.12% although we continue to believe it is more likely -- the NIM is more likely to settle in the 4.75% to 5% range over the course of the year.

Our loan and lease portfolio experienced strong growth, and our pre-tax income of $55 million was 17% above last quarter.

With our pipeline strong, we expect continued solid new loan production, as well.

Our deposit growth of 4% was strong and above planned, although the FDIC closing of a small bank in our footprint resulted in sizable new deposits for some of our offices.

Our overall deposit costs declined again this quarter by 5 basis points, and we were able to add new and renewing time deposits at an average of just 91 basis points.

We expect our cost of total deposits will remain in a very narrow range relative to our current level at 98 basis points as our book renews over the course of the year, and the current very low interest rates remain in place.

Based on our current loan growth expectations for $224 million in the first quarter deposit growth and existing liquidity, we anticipate the need to raise just $200 million to $400 million of additional deposits over the balance of 2012.

As a result, we expect only a small increase in deposits in the second quarter.

Our total assets at the bank at quarter end were above $7 billion for the first time, such that 85% of total CapitalSource assets are now in the bank.

The bank surpassed $5 billion in loans and leases in the quarter, also a first.

Our credit performance continued to improve across all metrics, resulting in a provision of just $2 million, and no net charge-offs.

Our total non-performing assets declined by $30 million, or 24%, and our allowance for loan losses as a percentage of non-accruals increased to 116% by quarter end.

It's very satisfying to be able to report this strong financial performance, which has resulted from the execution of our strategy, and lots of hard work by my colleagues throughout the Company.

We will continue to pursue our core strategies in the coming months, while taking the steps necessary to position the parent to apply for and receive bank holding company status, so that the bank can ultimately convert to a commercial charter.

John is up next.

John?

Thank you, Tad, and good afternoon.

As Jim and Tad both mentioned, the first quarter of 2012 was better than we expected, and we were pleased with the bottom line net income of $25 million, or $0.10 per share, despite a $26 million tax expense in the quarter.

We indicated in our fourth quarter call that an outsized tax expense would occur in the first quarter, as we completed the process of establishing a full valuation allowance for the bank related deferred tax asset.

$22 million of the first quarter tax expense was related to that one item, and we believe the process is now complete, so no additional tax valuation charges are anticipated.

To be clear, we expect to record consolidated tax expense of approximately $5 million per quarter over the balance of 2012, and prior to the partial reversal of the tax valuation allowance.

As previously indicated, we expect approximately 60% of the $514 million valuation allowance will reverse by the end of this year.

The amount of the realizable valuation allowance will naturally decline throughout the remainder of 2012, as we generate taxable, consolidated earnings.

As we have said on numerous occasions, however, we still expect at least $1 per share to reverse and be added to book value by year end.

The parent company unrestricted cash at March 31 was $107 million, which was down approximately $35 million from the prior quarter.

The principal uses of cash in the quarter were share repurchases of $29 million, and ordinary operations.

The two largest sources of cash were the $80 million dividend that was received from the bank in February, and the $33 million in loan repayments from a non-securitized loan portfolio.

Available liquidity also supported the repurchase of an additional 5 million shares in the second quarter, pursuant to a 10b5-1 plan, at a cost of $33 million.

As we have previously described, sources of cash at the parent during the remainder of this year will include quarterly tax payments from the bank, which we expect to total approximately $35 million to $40 million, based on projected bank taxable income.

The other primary source is principal repayments from the $500 million remaining non-securitized loans held at the parent.

We expect incremental liquidity from that source to be $120 million over the balance of this year.

Expense management remains a high priority, and we are anticipating additional progress during 2012 in our effort to reduce consolidated operating expenses on top of the nearly 22% decline we achieved over the past two years.

Specifically, we have forecasted a $15 million to $25 million reduction this year in our total operating expense base, resulting in full year consolidated operating expenses of $190 million to $200 million.

The move of approximately 200 parent company employees into the bank on January 1 increased our operating expense ratio at the bank by 16 basis points to 2.28%.

But we expect a gradual decline toward our 2% target, 2% of assets target over the next two years.

Also, as projected, our efficiency ratio was up a bit, at 41% for the quarter, though still meaningfully below comparably sized banks, we expect that percentage to decline back below 40% over the same two year period.

I want to touch briefly on consolidated credit in the first quarter, then turn the call back to Jim for closing remarks.

Non-performing assets declined 13% to $272 million, and the level of non-accruals declined 15% from the prior quarter to $238 million, or 2.9% of total loans.

Charge-offs were dramatically lower at $13 million, compared to $66 million in the fourth quarter of last year, and trailing 12 months charge-offs continue their downward trajectory at 3.3% of average loans, compared to 4.6% in the prior quarter.

This is all good news, as was a quarterly provision of $11 million, compared to $12 million in the prior period.

Jim?

Thank you, John.

We see our first quarter financial results as both an affirmation of our strategic direction and core business model, as well as a good indicator of the Company's expected financial performance for the balance of 2012.

Our business model is built upon our national lending platform, with its diverse and largely specialty niche businesses, which provide substantially more opportunities to make loans throughout the country than comparably sized banks.

The non-commodity nature of the majority of our lending is the primary reason we are able to produce the above average all-in yields, which make our business more profitable than most.

Equally important is the highly efficient deposit gathering franchise we have; 21 California branches, with deposits now exceeding $5.3 billion, and the capacity, we believe, to grow sufficiently to meet our funding needs for at least the next three years.

Our high level strategic direction is quite simple.

We are growing assets and profitability at CapitalSource Bank, responsibly reducing both the left and right side of the parent company balance sheet, carefully monitoring the credit profile of new loans, while prudently reducing legacy problem loans, and returning excess parent company capital to shareholders.

As I said at the outset of this call, our first-quarter results were characterized by meaningful loan growth, a strong net interest margin, higher net interest income, declining operating expenses, and an improved credit profile.

Cash generation at the parent has allowed us to repurchase an additional 24 million shares since the first of the year, which brings the total buy-backs since inception of the program in December, 2010 to nearly 96 million shares.

We look forward to strong performance on each of these measures, as we move through the balance of 2012.

I also want to take this opportunity to congratulate our founder and chairman, John Delaney, on his convincing victory in the primary election earlier this month for the sixth Congressional District in Maryland.

As previously announced, John has resigned as Executive Chairman, but his entrepreneurial spirit and strategic vision will forever permeate the CapitalSource Organization.

John has enriched the lives of countless individuals at the Company who have been fortunate enough to work with and learn from him.

We are grateful for his many contributions in the past, and the ongoing counsel he and the other Board members provide.

John's service to CapitalSource has been nothing short of extraordinary.

If he is successful in the fall, the United States Congress will be much better for his presence.

Operator, we are now ready to take questions.

Thank you.

(Operator Instructions)

The first question comes from Mark DeVries at Barclays.

Yes, thank you.

Could you provide us the detail for the non-recurring items that benefited the NIM that you referenced in the earnings release?

Sure.

I'll address that one.

During the latter part of the first quarter, we saw an uptick in the general level of interest rates, which caused a slow down in the pre-payment speeds, the expected pre-payment speed assumptions for our agency MBS securities.

And so that slow down, and although securities sit at a premium, causes to reverse some of the premium amortization that was previously recorded, so that impact was approximately eight basis points on the overall, on NIM.

The second component was about five basis points, due to the payoff of some non-accrual loans during the quarter.

And the last piece is about eight basis points of accelerated amortization from the loan payoffs over the level that we would normally expect to see on a quarterly basis.

Okay so the slow down on the pre-payment speeds, is that also what caused the yield in the securities book to go up pretty significantly?

Yes, that's correct.

And just one kind of caution on that.

Since we ran those pre-payment speed models, and when we had the assumptions from the third party, the interest rates have come back down, so most likely some of this benefit will reverse out during the second quarter.

Okay, got it.

And Tad, could you give us a little color on the different situations under which you might trend towards the higher end or the lower end of the guidance of 4.75% to 5% NIM?

Well, you know we have been talking about the most has been the competition, and the impact of the repayments.

Our loan book has started to repay fairly dramatically, and as you might expect, most of those repayments, our interest rate is well above the average rate on our portfolio, so just the simple act of repayments occurring, and the new production occurring at lower levels is what we expect to drive the long-term NIM.

However, despite having said that for the last three quarters, and also having said our cost of funds can't get any lower, our cost of funds has continued to go down, and we're now projecting it to go down slightly in the next quarter, although we're not raising a lot of new deposits.

We've not seen that competitive impact.

We've seen the competitive impact Jim mentioned in the multi-family, but we have kind of scaled back from that.

And some of the businesses that we are in continue to be specialty in nature, and although we hear about competition, it hasn't flowed through in our new production yet, but we continue to expect that to occur.

So that's a long way of saying we still think the NIM will go down, all these one-timers that John mentioned will ultimately go away, and we will see that compression.

As far as the low end and the high-end, it is just a matter of how much weight you place on those various factors that I've described.

Okay, great.

And then finally, given your guidance of that NIM range, and the target of the 2% OpEx ratio, kind of where your capital requirements are at the bank, what do you view as kind of a near-term, medium term, sustainable ROE at the bank?

10% to 12%?

For the bank, I would put --

Fully taxed.

It would put it at 10% to 12% at fully taxed level.

Okay.

Great, thank you.

The next question comes from Aaron Deer at Sandler O'Neill.

Hi, good afternoon, guys.

Hello, Aaron.

Over the past several quarters you've had some securities investment gains that you've realized.

This quarter you did not.

I'm just wondering what your thinking is on this, your appetite for taking gains as we go forward, and where the unrealized gain was at quarter end?

The majority of the investment securities, I think, that you referenced are held at the parent company, and some of those were taken in lieu of foreclosures, and others were equity investments that were made alongside of making loans previously.

A number of those are illiquid, so the opportunities to realize gains are not always in our control.

We'll look for opportunities to dispose of them when it is reasonable, but it is a number that I don't think is easily predictable, in terms of what we would expect to be in terms of gain.

Relative to where we hold those securities, the unrealized gain, Aaron, I'm going to have to get back to you.

I think it's about $20 million or so, but I'll have to get back to you on that number.

Okay.

And then it looked like the principal repayments slowed some in the commercial finance segment from maybe the pace we've had more recently.

Kind of given the maturity schedule on what you've seen with the early pre-payments, what is your kind of expected level of pay downs going forward?

Well, as you said, as that balance gets smaller, by definition, the level of pre-payments that we are going to have is going to get smaller, and John discussed this in his comments, as well, in terms of what we are expecting, which is on the non-securitized portfolio.

We are looking to get roughly $100 million to $120 million over the rest of this year.

Okay.

All right.

Thank you.

The next question comes from Moshe Orenbuch at Credit Suisse.

Mr.

Orenbuch?

Hi, can you hear me?

Sorry about that.

Yes.

A couple of things.

Could you talk a little bit about the credit performance at the bank in terms of the charge-offs?

Obviously, the net recovery is a wonderful thing.

Was there anything unusual there?

What might that look like as we go forward?

Well, no, there was nothing unusual.

This trend of continuing has been ongoing for some time.

The largest mover in this quarter was the removal of a fairly large loan from non-accruals, and that's what drove most of the improvements.

We still have that loan, but a large principal payment was received on that, and that, combined with some other factors, caused us to remove that from non-accrual.

So you saw a pretty good pick-up there.

But most of the really large commercial real estate loans, not all, but most at the bank have been resolved, such that we did not experience charge-offs in this quarter, and the credit non-performing asset ratio is trending down close to 1%.

I don't know that we have guided towards a charge-off number.

No, we haven't, and I'm just looking at the list.

The largest single charge off was $2.4 million, so there were a number of other smaller ones that ranged from roughly $1 million to $1.5 million.

So there was nothing that stands out.

Got it.

And, you had mentioned multi-family kind of being an area in which competition had increased.

What about, which areas are you seeing the best results in terms of your originations?

Which of the specialty areas?

Well, I think for us there is -- first of all, the commercial real estate area has been a very solid area for us, whereas multi-family, I think a lot of banks have flocked to that.

I think the traditional commercial real estate we've got a lot of, we do feel that we've got a lot of opportunity there, and that represented roughly 30% of our production this quarter.

In addition to that, our technology cash flow business has still been doing very well, our equipment finance business has been doing well, and our lender finance business has been doing well.

I also feel good about where we are at on our healthcare real estate business, and I think SBA has also been an area of pickup for us.

So we have had a lot of areas that are doing well.

I think what we're recognizing out there is that it is getting more competitive, and where we do not want to compete on proceeds, to a large extent, we can compete to the extent we need to on price.

But even on multi-family, we found that was just getting too overheated, and so we pulled back our reins on that a little bit.

Got it.

Also, as you had told us in advance, you did pay an $80 million dividend from the bank to the parent.

What happens going forward?

Is the bank able to pay out a percentage of its earnings, or do you just ask permission periodically?

How should we think about that?

This bank has been subject to a lot of regulatory oversight since its formation, but future dividends are formulaic, and are not subject to pre-approval from the regulators.

And you are correct, it is a function of your retained earnings and your future earnings going forward.

We're not modeling any dividend payments for the remainder of 2012 out of the bank, because we pretty much used up that allocation.

We are expecting to resume, or to initiate a payout ratio in 2013 of quarterly payments from the bank to the parent.

It will be a combination of our earnings and capital stress test at the banks.

Great.

And then just the last thing is I mean this I guess being the first time you bought back some of the trust preferreds, do you have a sense as to how much more might come to you in terms of that?

Or, you are just going to wait and see?

We really don't know what will come to us.

As I said, I think that was an opportunity that presented itself.

So we can't predict in advance what will come to us and when it will come to us.

Obviously, as you know, our focus has been on doing share repurchases over the last 16 months, and so, when we look relative to the troughs, we have to worry about tender offer rules to consider, and quite honestly, we just have no way of knowing if any additional sellers will present themselves to us.

Thanks very much.

You're welcome.

The next question comes from John Stilmar at SunTrust.

Good evening, gentlemen.

You highlighted previously the commercial real estate, technology cash flow, and lender finance.

Can you just spend a minute walking through the CapitalSource value proposition in each one of those business, relative to -- obviously banks don't do technology cash flow, or really that much in the lender finance, but specifically the differentiation in CRE.

I was wondering if you could kind of take us through each one of those major business lines this quarter, and what your competitive advantage has been, or what kind of niche are you servicing that allows you to be as competitive as it seems like you are succeeding in?

Well, I think I will first address the commercial real estate, and it will probably be difficult to go through every business.

I will try and touch on some of the key drivers.

I think in the commercial real estate, the fact that we have a national presence with existing relationships, I think, is very helpful to us.

And so we're having deals that are coming to us that may be outside of the sweet spot of some of the other banks, or too large for a local bank to do, and that falls right into our wheelhouse.

So when you sit there and say what do we do that others don't do, I think it has been our ability to respond to customers', needs particularly the timing for closing, and understanding the assets.

And so I think that's where our value proposition is in the team that we have, and our ability to close the deals, and close them efficiently and effectively.

And then on the technology cash flow and lender finance?

That I would attribute to the teams that we have in place, who have had a long-standing relationship with a lot of the private equity sponsors that are behind these deals.

I think we have been in this space for a long time.

We have treated our borrowers well, and delivered on what we promised we were going to deliver, and I think in this day and age, people do value the ability to close, and the ability to be there.

So our teams have good relationships.

They get initial feedback from credit committee very early, and they can tell a sponsor early on that we can or cannot do the deal, and I think what I have always found is a quick no is better than a long, protracted yes, so people know very early on in the process if this is a deal that we can or cannot do, and I think that does separate us.

Okay.

And you're not seeing in terms in like either one of those businesses getting pushed by virtue of the fact that the specialty nature of that, correct?

No, not at all.

Okay.

And in terms of my second question, when you talked about the bank ROEs of 10% to 12%, was that just sort of long-term thinking about business model, and ultimately, where pricing and capital will end up, or is there a little bit more refinement to that, in which we can kind of think about what the business mix might look like under that, and what the associated capital levels might be?

I was wondering if you could share a little bit more on that?

Okay.

Your last statement was the most accurate, in my opinion, and that, it's been difficult to predict a capital level, because not only has our capital been artificially high at the bank, we've operated under that high capital level for quite some time, I have heard other bank CEOs comment on the same thing.

In their case it might be Basel and some of these other things.

In our case, it's operating under a regulatory order that we don't believe will change until we convert to bank holding company.

So once that occurs, if you assume our capital is more normal, then you can just project the ROAs that we have been guiding to, which has been in the 150 to 180 range.

We can control the ROA.

We can't control the ROE.

So I think the ROAs this quarter at the bank was 185.

It's probably a little bit high.

We've been guiding to the one 150 to 170 range, so it depends on what capital you place on that.

As far as the business mix, loans versus securities, and the funding mix, we pretty much have that where we want it.

So it's really a function of the equity.

Okay, perfect.

Thank you, gentlemen.

The next question comes from Don Fandetti at Citigroup.

Hi.

Jim, I know we've talked about the valuation allowance reversal for some time now.

I mean, is that pretty much as locked in as it can be in terms of the timing, or is there still some things that need to be worked out?

Yes, relative to -- you are talking about the valuation allowance reversal on our deferred tax asset.

On the last call, we had communicated that we were expecting that to be a fourth-quarter item, and we still feel as strongly about it today as we did when we talked last quarter.

So we strongly feel that to be a fourth-quarter item.

Okay.

And, can you remind me on the timing of your BHC, in terms of when you might apply for that, and the best case scenario on achieving that?

Yes, this is Tad.

Don, when we first started talking about these large amount of stock buy-backs, and postponing the application process, we said no earlier than 2013, or we said sometime in the middle of 2013.

We also told the investors that the credit quality at the parent company, there were a number of factors, but that was probably the largest single factor.

The credit quality at both entities has improved dramatically in the last 12 months, and we are actually forecasting that to continue to occur through the remainder of this year.

We are still not guiding any earlier than 2013, but I would say we feel much better about early 2013 than mid 2013 as far as an application process.

Okay, thank you.

The next question comes from Scott Valentin at FBR Capital Markets.

Good evening.

Thanks for taking my question.

Just with regard to cash to holding company, I think end of the quarter, cash and cash equivalents and investment securities for sale just over $200 million.

But what is the right number in terms of cash you want to keep on hand going forward at the holding company?

Longer-term, we think of it probably in the $75 million to $100 million type range.

Near term, we will set aside $25 million for the converts that are due this coming July.

So I think kind of, in the short run, we'll hold something that's much closer to the $100 million to $125 million level, and then we will begin to trend that down, as the parent company shrinks down to say $75 million to $100 million.

Okay, thanks.

And then just with regard to origination volumes, you mentioned if you exclude portfolio purchases in the first quarter of last year, you had a pretty sharp increase in overall origination volume.

Does that reflect the hiring of personnel?

Do you think it's a little bit macro driven, in terms of just a change in outlook by customers?

It's interesting.

I think what helped us this quarter is that there were just a lot of different businesses that were all hitting on their cylinders right now.

And so from a macro perspective, we just had kind of a lot of deals that were teed up and ready to go, and so we felt really good about originations in the first quarter, and we feel good about originations in the second quarter as well.

I just feel, in general, it seems to me that there is more activity out there.

We are seeing exposure to more deals.

We are also seeing more competition, but I think you do see kind of more activity out there that we would have seen a year ago.

Okay.

And one final question.

Just on, I think someone mentioned earlier, the parent holding company credit.

It seems like the pace of improvement there has slowed.

Still pretty have high level of NPAs to assets, but the pace of improvement seems to be slowing a little bit.

Is that just a temporary timing issue, or is that something to be expected going forward?

Well, I think that is something we'll have to -- the reality is, you've got a lot of bigger loans in there, and so there's kind of big, chunky loans that move those numbers.

So I think for us, getting the resolution of these loans is the critical aspect of it.

As we talked about, we expect $100 million to $120 million of our non-securitized loans to be paid off the rest of this year, and I think as that balance get smaller and smaller and smaller, the chunkiness, for lack of a better term, of that portfolio declines, and I think you start to get to a more normalized number.

Our clear focus has been on reducing classified assets at the parent.

Some of that we are doing by selling off the loan, if it makes sense, but more often than not, we're allowing these loans to kind of work through their natural maturity, and have them pay off that way.

Okay.

Thank you very much.

You're welcome.

The next question comes from Henry Coffey at Sterne Agee.

Yes, a couple of questions.

When we look at your net equity, that's obviously a reasonable proximity for your sort of cash generation capacity at the holding company, minus, like you said, $75 million or $100 million.

Is that the right way to think about it?

Well, I think the other thing that you would want to take into account, that's not being shown at the parent yet in its net equity number is that the big impact will be the reversal of the valuation allowance for our taxes, which will result in additional cash payments coming from the bank over time, pursuant to our tax sharing agreement.

So when you sit there and look at the parent as a stand-alone basis, that's that next component that you need to add in there from what's going to be a realizable value.

But, it still, basically, a large number?

What's still a large number?

The ability -- you still have about $300 million plus of net cash for buying back stock, paying dividends, et cetera.

Right.

When you sit there look at the equity that's left at the parent, that's exactly right.

We agree with you, we have excess capital, and that's why we've been returning it as fast as we can.

Right.

And then, when you become a bank holding company, which is ultimately when you turn to your regulators and say, well, we have cash and cash at the holding company, and lots of capital, can we become a bank holding company, they are almost compelled to say yes.

So when you become a bank holding company, where is the level of -- where do you think your TCE requirements will go to, or your capital requirements, depending on how you want to measure them, or do you think they will still keep you in the 15% box for a while?

That's the $64 million question, and each quarter, somebody has asked me that, my thoughts would have changed.

We've kind of come full circle.

The bank, certainly, has proven it can operate on a much lower capital base, as does our competition.

So that would argue for a capital requirement closer to 12% risk-based, as opposed to 15%, and a tangible in the 8% to 10% range, versus, say, 12% to 13%, where we are now.

However, the trend across all capital requirements is for increases, not decreases, and we would be in a new commercial charter.

The parent would be a new bank holding company, and if you go back and look, there have been very few, I can count them on one hand, new bank holding companies approved over the last couple of years, so that would argue towards start slow and move slowly.

So, to tell you the truth, we haven't started, quote, negotiating those numbers, yet.

We've been focused on getting in, as opposed to what the price of getting in is.

So I could only speculate beyond what I've said there.

Certainly, you would have to guess it would be lower over time than where it is now.

It's somewhat -- it's not a risk factor, in that, basically, you're at the upper end of any bar they are going to create?

Exactly.

It's not a risk of going up, it's a question of how quickly it can go down, in my mind.

Just two other questions.

I missed your margin guidance.

I know you have given it out before, but it would be helpful to hear it again.

So, we look for the guidance, what we would guide to is something that's in the $475 million to $500 million range, the same level that we indicated last quarter.

And that's at the bank.

But you are in kind of a credit correction mode.

Can you make the case that some of those reversals that you benefited from this quarter are likely to occur again, at least over the next couple of quarters, or do you think this is basically it?

If you are referencing towards NIM, and the benefit of a non-accrual loan that's reversing, much like our other comments on credit, the portfolio is still kind of lumpy, so it's a bit of a challenge to try to predict that.

It's not an assumption that we make in our internal --

Exactly.

I wouldn't count on any large dollars from reversals of non-performers, but we expect loans to continue to pay off early, and to realize some of those benefits there.

But certainly not as much as we have the last couple of quarters.

Well, thank you, and congratulations on a great quarter.

Thank you.

Our last question comes from Vivek Agrawal at Wells Fargo Securities.

Hi.

Good afternoon, how are you?

I wanted to know, just to clarify, did you say that you repurchased $125 million of the trust preferreds in the quarter?

No.

It was in the second quarter, and we repurchased $25 million face amount.

Okay, thank you.

And, on the non-accruals, how much was that, in your mind, was due to credits improving versus the actual charge-offs?

If you're talking about the improvement in non-accruals -- (multiple speakers)

The decline of $38 million?

Yes, that was the loan that I referenced earlier, the large loan, where they made a large principal payment, and we put it on accrual status, so it was not -- that part was not related to a charge-off.

Okay, so the majority of that was due to that?

Correct.

Okay, thank you.

All right, thank you very much, everybody.

The transcript will be posted later today, as will the investor presentation, which has been up earlier, and the replays of the call will be available, as well.

Thank you.

The conference is now concluded.

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