CapitalSource Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: CapitalSource, Inc. (CSE)

CapitalSource (NYSE:CSE)

Q4 2012 Earnings Call

January 29, 2013 5:30 pm ET

Executives

Dennis Oakes - Senior Vice President of Investor Relations & Corporate Communications

James J. Pieczynski - Chief Executive Officer, Director, Member of Asset, Liability & Credit Policy Committee and President of Capitalsource Bank

Douglas H. Lowrey - Chairman of Capitalsource Bank, Chief Executive Officer of Capitalsource Bank and President of Capitalsource Bank

John A. Bogler - Chief Financial Officer, Chief Financial Officer - Capitalsource Bank and Executive Vice President - Capitalsource Bank

Analysts

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Mark C. DeVries - Barclays Capital, Research Division

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Donald Fandetti - Citigroup Inc, Research Division

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Operator

Good afternoon and welcome to the CapitalSource Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dennis Oakes.

Dennis Oakes

Thank you, Amy. Good afternoon and welcome to the CapitalSource Fourth Quarter and Full Year 2012 Earnings Call. With me today are CapitalSource CEO, Jim Pieczynski; CapitalSource Bank Chairman and CEO, Tad Lowrey; and Chief Financial Officer, John Bogler. 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 our website, which provides additional detail on certain topics which will be covered during our prepared remarks that we will not be making specific reference to the presentation.

Investors are urged to carefully read the forward-looking statements' language in 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 risk factors can be found in our reports filed with the SEC. Jim is up first. And following our prepared remarks, we will take questions. Jim?

James J. Pieczynski

Thank you, Dennis, and good afternoon, everyone. 2012 was a terrific year for CapitalSource and CapitalSource Bank. The solid fourth quarter concluded a full year of substantial achievement on a number of key financial metrics, including overall profitability, loan growth, reduced operating expenses and a consistently solid return on assets.

We also made important progress on 4 of our principal key strategic objectives for this year; number one was growing CapitalSource Bank, number two was stabilizing the credit profile of our consolidated portfolio, number 3 was reducing asset and debt at the Parent, and finally number 4 was returning over $460 million of capital to our shareholders.

In addition to this, we reversed over a $350 million valuation allowance on our deferred tax asset this year, which recognizes the value of that asset. The valuation allowance reversal free up an asset that will offset our federal tax liability for at least the next 3 to 4 years, which will create additional liquidity for the Parent. We also redeemed the last of our convertible debt in July, which leads low-cost, trust-preferred securities, which should not be getting mature until 2035, as the only remaining recourse debt at the Parent.

We ended the year strongly with consolidated net income in the fourth quarter of $47 million or $0.22 per diluted share, although that did include $0.06 per share of nonrecurring tax benefit.

Looking ahead to 2013, we remain confident in our ability to leverage our national specialty lending platform with our highly efficient deposit-gathering bank franchise in Southern and Central California in order to produce another year of significant loan growth and increased profitability at CapitalSource Bank, as we simultaneously continue the liquidation of our Parent asset and return of capital to our shareholders.

We also believe we are well positioned to achieve an important strategic objective during 2013, which is to become a bank holding company at the Parent and to obtain a commercial bank charter at CapitalSource Bank. Tad is up next. Tad?

Douglas H. Lowrey

We are extremely pleased with the financial performance of CapitalSource Bank during 2012. Focusing first on the income statement, our pretax income increased 21% over the prior year, which is reflected in 3 key metrics. First, we have experienced loan growth of almost 19%, which was at the high end of our growth expectations. Second, our net interest margin, or NIM, averaged 4.97% for the full year, and in the fourth quarter, our NIM was 4.84%, close to the midpoint of our expected range of 4.75% to 5%. And finally, our return on assets of 1.7%, 170 basis points, was above our long-term expectation of approximately 1.5%.

In the quarter, loan prepayment slowed, which reduced the favorable impact of the accelerated amortization of discounts and fees and contributed to a 13-basis point decline in our net interest margin, as we compare it to the third quarter. However, that's a good trade for us because we value the long-term benefit of loan growth and loan balances far in excess of the short-term benefit of this accelerated accretion that occurs. A lower contractual yield on new loans was another factor in the lower fourth quarter NIM.

We expect a strong net interest margin, again, this year, with the following factors causing compression: Number one, the ongoing runoff of amortization associated with loans purchased at discount; number two, declining loan yields as pricing pressure continues to persist on our new business volume; three, older higher-yielding loans being sold are paying off; and four, an expected return to a more moderate level of loan payoffs, which as I've said previously, bring one-time accretion benefits.

Generally, we do expect the NIM to be highest in the first quarter because of our large amount of cash redeployed into loans late in 2012. We think we'll see the benefit of that in the first quarter and then the NIM should decline modestly throughout 2013.

Our balance sheet grew and strengthened as well throughout 2012 with total assets and deposits up meaningfully, while the credit profile of our loan portfolio improved significantly. Loan growth in the fourth quarter was $442 million, which increased total loans and leases to $5.8 billion at December 31. Many of these fourth quarter loans closed at or near year end so we will not see the full economic benefit from the net interest income perspective until the first quarter of 2013.

Total assets for the bank at quarter end were $7.4 billion and that's up 9% for the year, and our capital level remains extremely strong. Despite the record production in the fourth quarter and full year loan growth of 19%, we still ended 2012 with Tier 1 leverage ratio of over 13% and total risk-based capital at 16.5%.

We reduced net deposit inflows to $44 million last quarter, as we successfully redeployed approximately $300 million of cash and investments into new loans. However, deposits were still up 9% for the full year. The cost of our interest-bearing liabilities in the fourth quarter fell below 1% for the first time since our formation in 2008, a decline of 4 basis points from the prior quarter. New and renewed deposits were added in the quarter at a cost below 85 basis points. We intend to continue to fund new loans in 2013 by reducing excess cash and investments.

Consistent with maintaining prudent levels of liquidity, we will also raise incremental deposits as required to support our expected loan growth in 2013. However, as I've said in the past, we do not expect any further improvement in our cost of funds this year.

All of our credit metrics improved throughout the year for the bank, primarily as evidenced by non-accrual loans, which were down 65% from the prior year to $42 million. Total charge-offs for the year averaged 22 basis -- were 22 basis points of average loans, and our year-end allowance for loan and lease losses was 235% of ending non-accrual loans.

Nonperforming assets were only 64 basis points of total assets at year end. All of these metrics confirm what I indicated at the outset, the fourth quarter and full year 2012 were solid by any measure for CapitalSource Bank.

Before I conclude, I want to update our plans briefly on achieving bank holding company status for the Parent and obtaining a state commercial bank charter for CapitalSource Bank. We now believe we've taken all of the necessary steps to ready the companies for filing the various applications that are necessary and we expect to receive approval for all of these prior to year end.

John will now provide additional color on some of the other key financial metrics for the quarter. John?

John A. Bogler

Thank you, Tad. As both Jim and Tad have indicated, 2012 was an excellent year for the company. We begin 2013 with a very strong balance sheet on both the consolidated and bank-only basis with high capital levels, growing earnings, solid credit profile and significant projected capacity to continue to return the excess capital to shareholders.

Net interest income at the bank increased 8% over 2011 and we expect modest expansion again in 2013 as projected loan growth should offset net interest margin compression, assuming a more moderate level of loan payoff than we experienced last year.

We took actions during 2012 to pay off debt, sell or otherwise as supposed with classified assets and reposition lower-yielding cash and investments on the bank's balance sheet into higher-yielding loans. We also maintained very strong capital level while paying $80 million dividends to the Parent in the first quarter of 2012.

One of our key objectives last year was to reduce the level of classified assets of both the Parent and the bank in order to ready ourselves for bank holding company application. We took a number of proactive steps throughout the year particularly in the third quarter to accomplish our goals, and we believe the percentage of classified assets remaining is now within acceptable parameters.

In addition to lowering classified assets, we made substantial progress last year reducing legacy assets. Full-year REO sales were $24 million, including $6 million in the fourth quarter, which reduced our remaining consolidated REO balance to just $7 million. We also hold foreclosed assets, which for GAAP purposes, are not recorded as REO but rather grossed up on the balance sheet. Foreclosed asset sales in the fourth quarter resulted in a gain of $4.3 million. Loan sales produced a gain of $1.5 million, and we are able to sell certain legacy equity investments and receive dividend income on others totaling $6.5 million.

It should be noted, however, that all of those fourth quarter gains from the sale of foreclosed assets, loans and equity investments and dividends on equity investments are considered nonrecurring. Virtually all of our credit enhancement activities taken last year related to legacy loans made prior to the formation of CapitalSource Bank. We continue to be very pleased with performance of loans made since the inception of the bank as they season, are performing better than our long-term expectation of 35 to 40 basis points annual charge-offs.

So our Parent cash flows supported our capital management activities in the fourth quarter and throughout 2012. In 4Q alone, we were able to return nearly $170 million to shareholders via a special dividend of $0.50 per share and share repurchases totaling $62 million. For the full year, we repurchased almost 50 million shares at a total cost of $343 million.

Since December 2010, we have reduced the share count by 121 million shares, resulting in a net 35% reduction in shares outstanding over that 20-year period. We did so at an average cost of $6.53 per share. Our board initiated a new share repurchase program last October with an authorization level of $250 million and there was $226 million remaining at year end. As in the past, any buybacks we undertake at the Parent this year will be dependent upon liquidity, share price, stress testing and other regulatory considerations. As our stock has been trading above tangible book value in recent months, it is important to emphasize the stock price is an important factor in our thinking regarding share buybacks and that our board will continue to look at all options including ordinary and special dividends for returning excess Parent capital to shareholders.

At December 31, we had $117 million of unrestricted cash in the Parent balance sheet, so we began the New Year with liquidity in excess of the minimum level indicated by our liquidity stress test model. We expect cash generation at the Parent in the year ahead will come from 2 principal sources. First, our repayment and loan sales in the non-securitized loan portfolio. We estimate that portfolio, which stood at $194 million at the end of the fourth quarter, will largely pay off by the end of 2014 and currently forecast proceeds of $100 million to $125 million during 2013. The second source of Parent cash is quarterly tax payments from CapitalSource Bank, which we expect will total approximately $60 million to $80 million this year. Loans that were securitized but will move to our non-securitized portfolios remaining debt as repaid are another potential source of liquidity. In fact, that happened earlier in January with the 2007-1 securitization.

We recently sold $68 million of loans from the Parent to the bank and the majority of those loans were previously in the 2007-1 securitization, which we also called earlier this month. Doing so permitted us to remove $47 million of securitization debt from the Parent balance sheet and added $33 million of loan to the Parent non-securitized portfolio, adding to the future liquidity as those loans pay off. We do not anticipate additional loan sales to the bank in the short term due to regulatory limitations, but we were very pleased to complete this transaction.

Additionally, the loan sold to the bank included 3 borrower relationships we'd like to maintain and resulted in incremental loan growth.

Turning back to operations, we exceeded our expense reduction target for last year, operating expenses would exclude debt extinguishment, operating lease depreciation, provision for unfunded [ph] commitments and REO and foreclosed asset expense were down $26 million at $186 million for the full year or 12% below the prior year. We expect 2013 consolidated operating expense to be roughly flat at $185 million to $195 million, as further operating efficiencies achieved this year should effectively fund the incremental operating cost of planned growth. Longer term, we still target 2% of assets as the operating benchmark for the consolidated enterprise and we plan to reset REO the next 2 to 3 years. Tax expense for the quarter was $11 million, which equates to an effective tax rate of just 18.9%. The reduction from a more normalized rate of 40% to 41% were caused primarily by certain nonrecurring items, including adjustments to the tax valuation loans for actual and expected use of capital loss carryforwards and reduced blended state tax rate for the company based on revised state apportionment factors, and a reduction in the state FIN 48 liability. Similar to the prior quarter, we utilized the NOL's carryforward portion of our DTA throughout that federal and certain state tax liability and attributable bank taxable income. The difference between our GAAP and cash tax liability is effectively pre-cash at the Parent because of the tax sharing arrangement between the bank in the Parent, under which the bank pays the Parent its full amount due as if it were a standalone filer. For the fourth quarter, this resulted in an incremental liquidity of approximately $17 million as our cash tax rate was only 4%, so the payment was not actually transmitted to the Parent until earlier this month.

We generally expect to report a normalized quarterly GAAP tax rate of 40% to 41% consolidated earnings during 2013 and the same rate at the bank's subsidiary level. Similar to what occurred in the third and fourth quarters of last year, however, that rate can move up or down at the Parent due to future capital gains or losses until the Parent's equity portfolio of approximately $25 million is totally liquidated.

When we reversed the DTA valuation allowance in the second quarter of 2012, we noted that 2 of the larger components for the remaining valuation allowance related to capital losses and state NOL. In the fourth quarter, we were able to sell some Parent equity investment and received capital gain distributions from other equity investment totaling approximately $7 million. Additionally, due to tax planning strategy and changing mix of our loan portfolio by state, we now believe we'll be able to utilize a greater portion of those state-specific NOLs. As a result of these fourth quarter events, we were able to report an additional relief for the valuation allowance, resulting in a tax benefit. There were other one-off adjustments during the quarter that also impacted the effective tax rate.

Further adjustments to remaining valuation allowance of $129 million are not predictable. And while they may occur, we cannot forecast timing or the amount. We expect our cash tax rate to continue in the single digits over at least the next 3 to 4 years as we utilize the substantial Parent company NOL to offset actual cash tax payment otherwise due on federal and certain combined state taxable income. Jim will now have some closing remarks. And then we'll be ready for your questions. Jim?

James J. Pieczynski

Thank you, John. As Tad mentioned, we have record for loan growth in the fourth quarter. We believe there were 3 principal reasons for that including, one, the seasonality in our equipment finance business, where our borrowers realized tax benefits from deal closed later in the year; two, uncertainties surrounding federal taxes as part of the fiscal cliff debate, which pushed a lot of transaction to close before year end; and three, we finally have entered into 5 new businesses since 2010, so each of those are still growing on a less mature basis than our legacy business segment.

Complementing the magnitude of new lending live quarter, the breadth and depth of our national lending franchise was evident once again. New funded loans were spread among all of our lending groups with the largest concentrations in healthcare real estate, equipment finance, technology cash flow, healthcare cash flow and multifamily real estate. This is one of our best quarters ever, despite having smaller vote sizes than we had prior to the formation of the bank.

For the full year 2012, general real estate, technology cash flow, equipment finance and healthcare real estate were our 4 highest producing business groups.

Our success during 2012 occurred despite a challenging, competitive environment. We've been speaking for several quarters about pricing pressure across many of our businesses. Some of it has been transitory such as the intense pricing pressure that we saw in generalized cash flow lending in the middle of 2011, but it has become more broad-based in recent months. Early last year, we began to see pricing pressure concentrated in multifamily lending. By the second half of 2012, it was spreading to a number of other business lines. In abundance of liquidity in a very low-interest rate environment, which appears will continue for at least the next couple of years, are the biggest drivers of this price competition. We have some protection from the more intense pricing pressure because there are fewer competitors in our specialty niche lending businesses than there are in more commodity-like businesses that other banks may rely in.

Our all-in loan yields for new loans funded for the full year 2012 averaged just above 6% even though we saw a steady decline in those yields throughout the year.

Our ability to grow our loan portfolio and to continue as John mentioned to redeploy excess bank liquidity into higher yielding loans should offset much of the margin pressure that would otherwise result from ongoing price competitions at current level.

Looking ahead to 2013, we believe our diverse product offering and our national footprint combined with the strength of our borrower and sponsor relationship will enable us to achieve double-digit growth in the bank's loan portfolio. Those growth expectations assume new originations of approximately $2.2 billion, no large loan portfolio purchases and reasonable projections for loan sales and repayments in our existing portfolio.

Prepayments cannot be predicted with certainty, however, and loan production could vary significantly from quarter to quarter so we do not expect loan growth to be level throughout the year.

Before closing, I want to reiterate 1 point which overrides any numerical growth objective. We are intently focused on the structuring credit quality of loans we make. As John mentioned, the credit performance of the nearly $8.7 billion of loans that have been funded since the bank was formed suggest we are achieving our credit objective.

But with that, we do not intend to let down our guard if volume begins to decline. Reflecting our credit first mentality, we will walk away from business that we feel is inconsistent with the disciplined underwriting criteria that we apply to all new loans we review. Our strength as a national balance sheet lender with a diverse group of specialty businesses run by experienced individuals positions us nicely for another year of increased growth and profitability, despite the challenging competitive environment and a slowly recovering national economy.

In sum, we entered 2013 with an optimistic, though I believe, realistic view of what we can achieve in the year ahead. At CapitalSource Bank, we expect to be able to grow our loan portfolio, our net interest income and deposit while maintaining a solid return on assets, expense discipline and a continuing stable credit profile. At the Parent, we will continue to wind down the loan portfolio and return additional capital to shareholders. We then -- we intend to execute on these financial performance objectives while simultaneously pursuing bank holding company status and obtaining a commercial bank charter. Operator, we are now ready for the first question.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Steven Alexopoulos of JPMorgan.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

I want to start, many banks like yourself are showing good loan growth in the quarter, but due to margin pressure are not showing strong net interest income growth. First, are you still comfortable with the bank margin in that 4.75% to 5% range as we move into 2013? And then secondly, do you see enough earning asset growth in the pipeline to offset this and show net interest income growth similar to say where you were you were in 2012?

John A. Bogler

Steve, this is John. As we look at the net interest margin, Tad kind of highlighted the variables associated with that. One is the repayment of older loans and higher coupons. Two is the introduction of new loans which we are seeing some pricing pressure. Three is the slowdown of loan repayment which will slow down the amount of amortization. And then the fourth component of that is that we call substantial loan growth late in the fourth quarter. And so we are able to redeploy from cash in the lower-yield investments and into loans. And so we think that on latter part, we'll produce approximately 15 basis points of NIM benefit in the first quarter, and then that will be offset by some of the other activities that I mentioned earlier. So we think that the NIM will trend down over the course of the year, but we do expect that we'll stay above the 4.75% NIM throughout the course of the year. And then in terms of kind of our net interest income, we would look for that loan growth to be able to offset that NIM compression such that we have just modest expansion in our net interest income.

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

John, it's helpful. Just one other question, with total capital down to 16.5%, how much cushion do you think is appropriate to maintain currently above that 15% requirement? And just given your comments about the stock above tangible book should not be expecting buybacks?

Douglas H. Lowrey

I'll take the firs. This is Tad, Steve. The first part of that is you really have to -- because of our regulatory situation, you have to look each company separately for capital. At the bank, 16.5% is too much of a cushion. We would like to run that closer to between 15.5% to 16%. We would take care of that to either growth depending on whether the growth continues like the fourth quarter or dividend to the Parent company. The Parent company, the 16% overall really misstates the fact that the Parent has far less capital but has a very high ratio of capital to access. So almost all of that is cushion and could theoretically be returned to shareholders were it liquid and depending on the stock price. So I'll let Jim comment on the last part of how we get that back.

James J. Pieczynski

And then I think in terms of how we look at our stock quite -- as you talked about, tangible book value is one. we look at kind of the ultimate earnings profile that we expect to the bank along with the timing of a liquidation of a Parent in terms of doing, what do we think the entity is worth totally? And we look at based on that we say, what price do we think we should be buying our stock at? Naturally, we've have said before that we never really communicate the way we look at, what price we should be buying our stock and we're not really changing that position today. However, in addition to that, we've also, as we did in the fourth quarter, we made a special dividend. And that is something that we would consider in the future. And in addition to that, we talked about that we'll continue to reevaluate our regular dividend policy over time. So we view it that we've got the 3 levers for returning the capital which is: Buying back stock, doing special dividend and doing regular dividend but at this point, we're kind of looking at all of those options.

Operator

The next question comes from Jennifer Demba at SunTrust Robinson Humphrey.

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

I'm just wondering as you look over the next 12 to 18 months, what categories would you see driving the majority of your loan growth?

James J. Pieczynski

Well, I would say -- in terms of our big producers from an origination perspective and probably similar to what you saw in 2012, we obviously have a lot of activity the Commercial Real Estate space. We've had a lot of activity in the Healthcare Real Estate space and in our equipment finance space. So in terms of what are going to be the big drivers of loan origination, I would say those would be kind of the big 3. And then if you also look at our Lender Finance base, I would say that's also going to be another producer.

Operator

The; next question comes from Mark DeVries at Barclays.

Mark C. DeVries - Barclays Capital, Research Division

So when we think about your ability to return capital to Parent, will that mainly come from the excess liquidity that you have outlined? John, I guess the $100 million, $125 million of cash in the $60 million to $80 million of payments tax use in the bank on top of the $100 million to $125 million of repayments that you expect?

James J. Pieczynski

Right. So at the end of the year, we have $117 million of unrestricted cash. And we think that we need to maintain currently based upon our current liquidity stress test models about $60 million. So we start out with above $57 million of available liquidity. And then through the course of the year, we expect to generate roughly $100 million to $125 million from the non-securitized portfolio and then another $60 million to $80 million from the bank tax payments that flow up to this pair.

In the past, we've also talked about the ability for the bank to make dividend payment out to the Parent. We haven't necessarily highlighted that for this year as we think that we'll need to maintain the capital in the bank to support the overall growth of the bank's balance sheet. The fourth piece that I alluded to in the comments is that we have the loan that sit in the securitizations today. As that debt is repaid, we're able to free up those loans and move them over to the non-securitized portfolio. We haven't given any sort of indication, but that is another source to potential liquidity that could be generated once that debt is repaid.

Mark C. DeVries - Barclays Capital, Research Division

Okay. So the thing about that, it's kind of a minimum of $250 million, excluding the securitized portion of potential for dividends that you didn't have the capacity to return over the course of 2013, is that right?

James J. Pieczynski

That's right. So we take those 3 components, beginning $57 million, the $100 to $125 million, plus the $60 million to $80 million .

Mark C. DeVries - Barclays Capital, Research Division

Okay. And you would either through dividends or buybacks, is able to distribute that?

James J. Pieczynski

Correct.

Mark C. DeVries - Barclays Capital, Research Division

Okay. And is there anything to read into to the fact that you did do the large special dividend at the end of the year about what you think of buying back the stock here, or was that just prompted by a need to return a lot of capital before the end of the year?

Douglas H. Lowrey

That's a good question. Naturally, that's an easy way to return a lot of capital and we felt that was a good, effective way of making that happen. In addition to that, just based on conversations we've had with shareholders, you have a lot of people that are in favor of stock buybacks, you have a lot of people that are in favor of dividends. And I think you kind of have a mixed group on all of that. So our thinking behind that was in addition to being away and to return capital in a quick manner to our shareholders, it also provided somewhat of an accommodation to those people that were more in favor of dividends over stock buybacks. I think you're can to have 50 people in a room and you'd come back with 25 on one side and 25 on the other. So we felt by doing a measured approach given that we returned over $900 million in capital to our shareholders since we started this, having $100 million of it come from dividend, we didn't think was a significant amount relative to the overall return that we've made.

Mark C. DeVries - Barclays Capital, Research Division

Okay, great. And then just finally, as far as sources of funds that you used to fund any loan growth at the bank, should we expect that you'll continue to liquidate securities or use excess cash as opposed to trying to raise more deposits to fund growth at least in the near term?

James J. Pieczynski

Yes, both. It'll be a bit of a transition. We think we've got roughly $200 million, $250 million of excess liquidity on the bank's balance sheet today. So a combination of redeploying that into loans and then also growing deposits will fund our loan growth for the year.

Operator

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

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Just wanted to follow up on the loan growth in the quarter. I was wondering if you could give us a sense of what amounts of that might've been pulled forward as you mentioned as a result of tax considerations and people to strike a deal closed before year end?

James J. Pieczynski

That's a good question. And I think that's difficult to kind of figure out. I think more than anything, you always have your natural, I just call it a self-imposed deadline of year end to get people always trying to get something done by the end of the year. So naturally, the fourth quarter is going to be higher as a result of that. I think this year, with the fiscal cliff and everybody wondering what was happening with tax rates and capital gains rate and all that, I think people are just much more focused on trying to push those deals into 2012 over 2013. So it's very difficult to say how much of that was a result of that. Clearly, it was a large quarter for us. It was an outsized quarter. And just kind of intuitively, by everybody being focused on getting it done by year end, it's logical that, that number was as high as it was. And I would expect we'll really see the impact when we see what our originations in the first quarter because my guess is they'll definitely be lower than where we were in the fourth quarter, but I think you'll find that they're on the low side of the historically low end.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

There's maybe another way of looking at that. Given kind of where your pipeline had been running and then where it is today, how much of the pipeline kind of got emptied out in the fourth quarter? Is that...

James J. Pieczynski

That's a good question. We actually still have a strong pipeline. We had a reasonable level of loans that still ended up closing in January despite the push for year-end closing. And then in terms of our pipeline, in terms of approved deals right now, we still have a significant level of deals. So I'm not expecting the first quarter originations just like fall off the table and, oh my God, where did they go? I think it will still be a reasonable number. And I still feel good about the pipeline and the closing that we've had so far to date.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then I know you guys have been getting more granularity in the portfolio with new originations. Can you give us a sense kind of what the average size of new originations were in the portfolio? And I know you've got a pretty vast range, given the different segments that you're in. But maybe just kind of give us a sense of where that stands and then what maybe some of the larger credits that you might have booked in the quarter, what size those were?

James J. Pieczynski

Yes. If you look at it in terms of where we're at for just about this quarter, the average loan size that we had for -- hold on, I'm just looking at this right now. We have $843 million of originations closed. That was a total of 127 loans. So I haven't calculated what the average -- what that works out to be on an average loan, but that gives you that number. Included in there, if you want to kind of -- were 16 loans in the SBA space, 16 loans in multifamily and 30 in the professional practice lending, which is a smaller deal -- that's where you've got your kind of smaller loan amount. In terms of your question on what were the size of loans closed during the quarter -- just hold on 1 second, I got that as well. If you look at the top 10 loans that we had for the quarter resulted in roughly $350 million of loans that were generated.

Operator

Our next question comes from Moshe Orenbuch of Credit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Kind of keeping on the loan growth, any guidance you can give us as to what the yields on the newer loans were? I know you've mentioned that they -- where they began the year and that they have been declining, but today, were they able to be still above where your margin is on average?

Douglas H. Lowrey

If you look at what our yield was on loans originated this quarter, we were at the 5.77% rate. In terms of what do we expect in terms of origination going forward, I think we feel good about the yields that we're at. It's very difficult to those who kind of say, where do we think spreads are ultimately going to be going over the coming year. But you've seen kind of a market decline in terms of, do we think there's movement or do we expect movement in that yield to go down slightly from here? The answer is that there's probably going to be some movement downwards. I just don't know how much that ultimately is.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Is it fair that -- it looks like from the math that there's probably, the average balances were probably 5% or so below the period end balances, that math seem about right?

Douglas H. Lowrey

That's right. I think in the bank, I think it's about $270 million difference between the average balance and the period end balance.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Right, okay. Okay. And then I guess, I'm sort of wondering about the fixation with tangible book per se from the position of stock buyback. And I guess -- maybe 2 questions on that. The first is the positioning of the stock doesn't -- should and when I confirm that it doesn't affect your thought about total capital return, just a form of it, right?

Douglas H. Lowrey

That's correct.

James J. Pieczynski

That's correct.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Okay. Okay, that's good. And then, I guess, I mean, not really clear why that tangible book is a particular threshold from the standpoint of your thinking about the stock being attractive or less so, I guess. And maybe you could kind of amplify on that?

James J. Pieczynski

That's a fair question. And again, I think part of this is you have to focus on the evolution of our process in our stock buyback. When we started this process, our stock was trading below tangible book value. And quite frankly, we viewed it that no matter how you look at us based on earnings, based on book, tangible book or whatever, it clearly makes sense to buy that. And so we thought that was, I'm going to say candidly kind of a no-brainer decision internally as to whether or not we should be buying back stock. As time went on and as we start to get closer and closer to tangible book, more than anything, I think we were hearing from some of our shareholders on the outside, does it make sense -- the question of, does it make sense to be buying above tangible book, I think and we look at it personally saying that as time goes on, I think there's really 2 components of our company. The first is the bank and you can value the bank based on its earnings and you can do it based on earnings, you can do it based on tangible book but there's clearly a value associated with that. The second part of it is the Parent, and the Parent's got over $500 million of equity. We stated to the world that our goal is to liquidate that as quickly as we can. And so obviously, you kind of sit there and have to take into account the net present value of the liquidation of the Parent portfolio. So when we look at it, that's how we look at it, we look at those 2 components and make our determination based on that. I think historically when we talk to people, we talked about tangible book because that's kind of an easy metric that people have looked out in the space. But I wouldn't say that we're sitting here and saying that we won't buy over X of tangible book. That's one of the things we look at, but that is not the sole driver of our decision.

Operator

Our next question comes from Don Fandetti at Citi.

Donald Fandetti - Citigroup Inc, Research Division

Tad, the NIM obviously that you're generating is pretty attractive relative to other banks. And you've mentioned that some of your businesses tend to be more nichey, which has been the case at CapitalSource. I wonder if you could just talk a little bit about what percentage of your sort of book of business do you think is more defensive to that spread compression and why wouldn't you see even more competition in some of those areas as the market sort of grinds more competitively?

Douglas H. Lowrey

Yes, we will, we have seen that and expect it to continue. But we typically see when new folks come into the space, we believe they typically underprice it for the risk and typically doesn't last long. As far as the percentage of commodity-type businesses, we would consider PPO, multifamily and SBA more commodity-like and that's probably roughly 20% of our business, so you could -- 25%, let's say, so 3/4 of it is more specialty in nature. Some of those specialties, one of those would include leverage lending, which is certainly subject to pricing pressure. So if you add that in, it probably gets closer to 60%. But that's why we're guiding down because we see some of these competitive factors. But we've already factored that into our going-forward analysis.

James J. Pieczynski

The other thing to keep in mind, though, we always remind folks about is, you can't be 100% specialty lending and run a bank on 10% capital. And our goal is to run this bank on much lower levels of capital. And we need to demonstrate sustainable returns in all environments and part of that is having a more commodity-like balance sheet. So I'm willing to give up some of our NIM in return for lower capital. We've given up the NIM, we're waiting on the lower capital.

Operator

Our next question comes from Henry Coffey of Sterne Agee.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

As you started looking out -- growing out some of your more Commercial Real Estate businesses and of course some of your SBA book, is there a foundation for, say, transferring into more transactional -- the more transactional site at some of these refinancing that's coming up? You have all the infrastructure in place to do obviously fairly well thought-out multifamily lending. That's obviously an area that's going to see a lot of refinancings this year. CMBS market is going the same way. Have you given thoughts to building a more transactional model and funding stuff off balance sheet or selling it to the secondary market?

Douglas H. Lowrey

No. We have not -- from our perspective, we have been a balance sheet lender and it's our goal to continue to be a balance sheet lender. I think we view it that the cost of funds that we have at the bank are attractive. So there's no need at this point to start to be accessing the securitization market or kind of moving into that side of the business. So at this point, I think for the foreseeable future, we continue to see ourselves as a balance sheet lender and funding ourselves with deposits.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

The comments on the paydown on the holding company level, non-core assets. Does that assume sales or is that just more the likely kind of liquidation path of those assets?

Douglas H. Lowrey

Both. We've been pretty aggressively disposing those assets and we would expect that to continue, but we haven't really guided to the percentage of each.

James J. Pieczynski

And as John had talked about it in his comments, but if you look at that Parent portfolio that we had at the end of the year, it was $526 million, $68 million of that portfolio was ultimately sold to the bank in January. So you've got -- you even have that component of it as well.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

You mentioned the tax item of $0.06 a share. Are there any other adjustments we should make to reported results to get a better sense of the run rate?

Douglas H. Lowrey

Yes. One of the other components to that we need to adjust is the gains in sale of equity investments, as well as the dividends from equity investments. We still have about a $25 million portfolio of legacy equity investments at the Parent and it's very difficult to predict whether we'll receive future dividend income on those investments. And they are highly a liquid, so it's challenging for us to try to be able to sell them at any reasonable price. So that's an area we look to make that adjustment. We also sold a foreclosed asset, these couple of radio stations that the company foreclosed on a number of years ago, and we're able to sell out of those assets when we realized about a $4.3 million gain. So those are the 2 adjustments that I would additionally make.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

And what were the investment gains on the equity portfolio?

James J. Pieczynski

$6.5 million.

Operator

And the last question comes from Sameer Gokhale at Janney Capital.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Just a couple of quick ones. I guess, number one, I'm just curious on the sale of the equipment at the equity investment and the $6.7 million gain. What was the amount of the underlying asset, the investment that was sold, just about the calculated gain percentage?

James J. Pieczynski

I don't have that number, but I don't believe it was overly material. No, these are written down so it wouldn't give you the correct number, but I can tell you that most of the, what you're calling gain, were dividends from investments we still hold. [indiscernible] percentage of that were dividends which were unexpected and obviously accelerated into the fourth quarter.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay. And then the other question I had was more kind of big picture look. You talked about your growth opportunities and originating loans and the competitive environment. I'm just trying to get a sense for when you think your returns on equity could get to sort of the mid-teens level if, in fact, that's a reasonable target for you guys. And what is the road map to get there? And certainly one way is to return the excess capital that you're sitting on. But with the combination of that plus your earnings power of the company, I mean, is it reasonable to think that this is -- 2014 would be reasonable for you to get to sort of a mid-teens number? And other thing is also on operating expenses. Looking at your targets and just looking at the efficiency ratio, do you think that would necessitate further decreases in your OpEx ratio and improvements in that efficiency ratio to get you to that mid-teen size? How do you think of the various levers there? And is '14 like a reasonable time for me to get there?

James J. Pieczynski

Okay. I can talk about the levers but not the date. And you'll see why at the end as we think we've built the model to produce the returns. The bank produced 170-basis point return on assets throughout 2012. Our long-term goal is 150 basis points on assets. Both the bank and the Parent company are producing those on far too much equity. We think that some of the factors we've described as like margin compression and potential increases in costs for infrastructure like you described that those are generally flat and will be offset by the continued growth in the balance sheet and the continued growth in the loan portfolio. So for us, it's all about capital. And that's why we talk so much about returning capital to Parent company and converting the charter at the bank level because we don't believe until both of those occur, we will be able to achieve anywhere near the mid-teens return on equity. And the way I like to think about it is if the consolidating enterprise can generate 150 basis points return on asset on 10% capital, that's your 15%. Right now, we're far, far in excess of 10% capital but we've already generated the engine that can produce ROAs in excess of 1.5, which gives us a little bit of a cushion there. Do I think we'll be there in 2014? No, because we think we'll get approval this year. But you don't instantly lever your capital down by 60%. And we have a pretty large amount of excess capital there. So I think it will take time to grow into it.

Dennis Oakes

That concludes our call, everybody. Thanks for listening.

Douglas H. Lowrey

Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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