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CapitalSource (NYSE:CSE)

Q1 2011 Earnings Call

April 29, 2011 8:30 am ET

Executives

Donald Cole - Chief Financial Officer

Douglas Lowrey - Chief Executive Officer of CapitalSource Bank, President of CapitalSource Bank and Director of CapitalSource Bank

James Pieczynski - Co-Chief Executive Officer and Director

Steven Museles - Co-Chief Executive Officer and Director

John Delaney - Co-Founder, Executive Chairman and Member of Asset, Liability & Credit Policy Committee

Dennis Oakes - Senior Vice President of Investor Relations

Analysts

Robert Napoli - Piper Jaffray Companies

Michael Taiano - Sandler O’Neill & Partners

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.

Donald Fandetti - Citigroup Inc

Moshe Orenbuch - Crédit Suisse AG

John Stilmar - SunTrust Robinson Humphrey, Inc.

Scott Valentin - FBR Capital Markets & Co.

Henry Coffey - Sterne Agee & Leach Inc.

Unknown Analyst -

Steven Alexopoulos - JP Morgan Chase & Co

John Hecht - JMP Securities LLC

Operator

Good morning, and welcome to the CapitalSource Incorporated First Quarter 2011 Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Dennis Oakes. Please go ahead.

Dennis Oakes

Thank you, Maureen. Good morning, and thank you for joining the CapitalSource First Quarter 2011 Earnings Call. With me this morning are 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 call is being webcast live on the company website and a recording will be available later 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 carefully read the forward-looking statements language in our 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 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 furthermore, detailed information about risk factors can be found in our reports filed with the SEC.

John will begin the prepared portion of the call. After Don concludes his remarks, we will take questions. John?

John Delaney

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 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 4 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 of CapitalSource Bank and consistent profitability.

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

We have 2 strategic priorities at the company which are to execute on a strategy to utilize in a manner that enhances shareholder value the significant excess capital and liquidity we have accumulated at the Parent and to convert the bank to a commercial charter.

Regarding the latter, we began our pursuit of bank holding company status earlier this year, which is a path to converting the charter. Though 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 a 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 at CapitalSource Bank with our existing platform and charter, both of which happened nicely this quarter. As we assess and implement our strategic initiatives, we are mindful that we need to balance our top 2 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 and he will review the very strong loan originations in the quarter.

James Pieczynski

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. So with this, we see a very reasonable chance to exceed our original initial origination target 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 slowdown in the first quarter. Based on the loans that we've also closed in April and others that we have in the pipeline or our credit review process, we are confident that the second quarter will meet our run rate expectations of $400 million to $500 million, which we communicated earlier.

Though the largest concentration of new loans in the first quarter 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 5 quarters.

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

Multifamily and SBA [Small Business Act] loans in this quarter, for example, accounted for 47% of the total loan production and had an 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 that we originate directly, there are certain economies of scale that accrue with portfolio acquisition.

We are also buying more season 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 accounted 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 complementary to our core competencies and consistent with our bank regulatory framework.

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

Douglas Lowrey

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 already 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 prepayments. 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 have 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 an absolute basis and relative to all industry benchmarks. Our total assets increased slightly by $63 million, and now stand at $6.2 billion and represent 2/3 of total CapitalSource assets.

The high level of loan prepayments 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 these factors are unlikely to combine with such magnitude for the remainder of this year, we expect the net interest margin will gravitate back 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 NPAs, as a percentage of total assets, declined from 5.4% to 5%.

As we've 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 gauge of overall credit performance in the bank. And those declined by 30% from $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 CDs 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 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 strategic growth over the next 12 months 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 a consolidated perspective. Don?

Donald Cole

Thank you, Tad, and good morning, everyone. The run-off 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'd expected the segment to run at roughly breakeven 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 earnings and resulted in lower than anticipated consolidated 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 the quarterly provision of $34 million, largely the result of the deterioration of 4 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 an apparel business which was written down to liquidation value.

Two of the other high provision problem loans were similarly to companies in the consumer products and services spaces. Though disappointingly high, these provisions reflect the lingering reality of the recession for many 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 more detail shortly.

We also had tax expense in the quarter, despite the planned consolidation of our tax payer entities which will result in the elimination of cash federal tax payments. I will also explain taxes in greater detail in a moment.

On the plus side on 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 certain cost-based investments, primarily in our European portfolio, and the sale of a portion of the bonds we retained upon the de-consolidation 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 than indicated.

We also had a decline of nearly $10 million in REO [Real Estate Owned] 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 in 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 continued to reduce Parent Company debt during the quarter and have 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 CSIII, CSVII and CS Europe credit facilities during the quarter. Earlier this month, we terminated the Syndicated Bank Credit Facility which had a 0 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 continue 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 4 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 payoff on April 1. As John indicated, determining the course of action which will result in the most prudent deployment of our excess capital and liquidity is a top priority for senior management and our board. Remembering, however, that 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 or 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 contributor 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 2 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 [Deferred Tax Asset] valuation which was $457 million at the end of the first quarter.

As we have indicated previously, we are eligible to file a consolidated U.S. tax return this year, which means that losses from certain of our entities can offset income and other profitable entities, principally CapitalSource Bank. The very important result is that for the foreseeable future we expect to pay little or no U.S. federal income tax.

Unfortunately, from a GAAP perspective, our tax items continue to demonstrate the complexity created by our termination of REIT 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, though we previously indicated an expectation that this number would be closer to 0.

The difference was caused by a GAAP rule that required us to re-establish a valuation allowance against the portion of the bank's DTA that had previously 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 these 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 0 for the third and fourth quarters.

Other than this change to 2011 tax expense in the first 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 again today but would be happy to discuss it further if anyone has a question. With that, operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from John Stilmar, SunTrust.

John Stilmar - SunTrust Robinson Humphrey, Inc.

Maybe we could start with just -- it's the commentary with regards to the regulatory -- the progress that you've had with the regulators in conversations. My question is what's really changed this quarter versus last quarter? Has it been more of a better understanding of -- is it procedural? Have there been questions that have been raised? I was wondering if you could just kind of characterize -- while you can't disclose the details, what's really changed this quarter versus last quarter?

Steven Museles

This is Steve, John. I think 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 that we have to take in order to be considered for bank holding company. Now 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's in the best interest of our stockholders. So we are going to take the time to think about how to proceed, and I don't know if anything’s changed, it's just that we've gotten more of a complete list of what needs to be done.

Donald Cole

One simple way of thinking about it is, the Parent Company is a certain size and I would say that to accelerate bank holding company -- so let's analyze the Parent Company for a second. It has a certain size and it 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 our shareholders, right, while simultaneously becoming a 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're balancing is a way of accomplishing kind of 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.

John Stilmar - SunTrust Robinson Humphrey, Inc.

So, is it fair then to think about 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 this capital...

Donald Cole

No. That is not an accurate statement. I would say the liquidity levels of the Parent and the capital levels of the Parent are widely acknowledged to be above standard, if you will. So it's really not about liquidity and capital at the Parent. I mean, as a practical matter, the Parent almost has a 100% capital because if you take the excess liquidity we have at the Parent and apply it against the recourse debt that exists at the parent and you assume the equity and the securitizations is, in fact, just 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 has abundant capital. I would say it's about size, ratios -- optically is it appropriate 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.

Douglas Lowrey

I don't want you to think that we don't believe there's a path to achieving these things. What I would like you to hear from us is that what we're in fact doing, which is looking at these 2 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 very important and create a lot of shareholder value. And we are trying to figure out a way of accomplishing both in kind of an optimal way as opposed to being forced to thinking about them sequentially, if you know what I mean.

John Stilmar - SunTrust Robinson Humphrey, Inc.

Yes, I do. I do. I’m much more clear. Secondly, with regards to -- or just touching on credit. It looks like on a dollar basis, we saw an increase in non-accrual loans in the 30- to 89-day bucket as well as in the 30- to 89-day bucket of delinquencies. You highlighted those were sort of cash flow loans that were related to a parallel or similar industry? I was wondering if you could -- as you think about the portfolio, and as we're kind of now into the second quarter as well, is this sort of a one-time in nature sort of the bumpiness and lumpiness of your portfolio or are there several other loans that are kind of getting close to the status of -- I'm just trying to get a sense for the pace of new inflows which seem to tick up a little bit. Is this just the reality of the business or are we starting to see a little bit of inflection in some of your other portfolio companies that we might think about in sequential quarters to manage expectations on our model?

Donald Cole

Yes. John, what I would say about that is, and I think you're looking at the one of the tables that shows the way the problem assets are broken out. I don't know that I pay that much attention to where the non-accruals flow through delinquencies. I think, ultimately, non-accruals will likely get there. I think I look more at the level of non-accruals and the pace of new non-accruals, both of which were down significantly this quarter. I mean, we mentioned, I think, the new non-accruals were 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, is what I mentioned about the significant 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 some of 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, well, we added 1.25 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 at the last 2 quarters, the real estate has really significantly come down. So my view is I expect the cash flow portfolio to follow similarly and that we've taken a lot of the hits on the bigger cash flow loans and we’ve worked to bring the exposures down. But 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.

John Stilmar - SunTrust Robinson Humphrey, Inc.

Okay. Perfect. And then finally, just with regards to taxes, and I apologize for my lack of knowledge here, but can you refresh my understanding? You have significant deferred tax assets, you have a huge valuation allowance that's almost 100% of that, and can you maybe just articulate again the accounting versus the cash flow? You've clearly said you're not paying any cash taxes. Is this just really a GAAP reconciliation in the path to sort of undoing the valuation allowance DTA and 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.

John Delaney

First, on this matter, no apologies necessary. And second, I would say yes. It's largely a GAAP issue. As I did indicate, we expect to pay no federal U.S. income taxes and that will manifest itself here in the first quarter. The bank had federal taxable income and it won't make an estimated tax payment. Ultimately, the bank will make its tax payments to the Parent as it utilizes its Parent's actual tax attributes, actual NOLs and losses. When it comes to DTA and the GAAP rules, as we have said in the past, we're in this 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 essentially a valuation allowance on almost all of our DTAs. We had a little noise this quarter where -- because when the bank was a stand-alone, it didn't have to have its valuation allowance. But now that it's part of a consolidated group, it has started to put some back, and again it will put some more back next quarter. But ultimately the path to book value accretion from that is we will -- as we go forward, when we’re 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 use our future forecasted income, which is very evident today from looking at our bank performance. But we'll be able to use that future forecasted income as an anticipated use of those DTAs. 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've 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 a 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. But 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 it's come down a little bit because of the '06-A gain. So largely, we'll have a very large book value accretion at the time that we are able to reverse the significant portion of the 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.

Operator

The next question is from Scott Valentin, FBR.

Scott Valentin - FBR Capital Markets & Co.

Just, I guess, kind of a, maybe, conceptual big picture question on bank holding company versus the return of capital question. I'm just trying to get a sense of maybe what kind of return the bank holding company status will provide. Is it in terms of -- obviously the better deposit mix ultimately. Is it sell bank acquisition or bank acquisition? Is it just the bank holding company status affording maybe a higher valuation to the company than maybe an ILC charter would? Versus -- I think investors are kind of hoping or expecting a billion dollars of liquidity to holding company, the ability to return capital and drive returns through maybe buying back stock, retiring debt, whatever it may be. But just trying to get a sense of maybe how you balance the 2 as you think about bank holding company status and what kind of ultimate return you can get of a bank holding company versus returning capital today?

John Delaney

It's a really good question and it's in part a really good question because it's exactly the issue we're wrestling with now, Scott. So and I think you inventoried things very well there in terms of the attributes of the 2 different priorities and ideally you wouldn't have to try to balance these things, you’d just plow ahead with both of them but converting the bank to a commercial charter, which is really the objective here is -- has certain benefits which you outlined, right? You're 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’re focused on, which we're not weighing all that heavily, but there is obviously a much more larger universe of banks, that are commercial banks versus what we have which is an ILC. It looks like a commercial because it's fully branched and there's no broker deposits, but it still kind of has a small asterisk next to it so eliminating that asterisk has value. But it really is kind of 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 CapitalSource lending customers, et cetera. So there's clearly value there, and it's clearly an 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 of the Parent, there’s clearly money there that we're not putting to good use right now because we're not really investing or lending it to Parent, and the bank has got -- its capital levels, as a practical matter, keep growing so it's not apparent that the bank ever needs any of that capital. So figuring out what to do with that capital and liquidity at the Parent because there's 2 things there. There’s liquidity, right, which can be applied against the debt that 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 getting it back to the shareholders, is very high priority.

So, I wish we could say right now how we have, in fact, balanced that and what the roadmap 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. But I don't know if Steve or Don if you could add anything. Or Tad, I don't know. Tad, do you want to comment on the benefits of converting the charter?

Douglas Lowrey

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. So 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.

Scott Valentin - FBR Capital Markets & Co.

Okay. I appreciate the detailed response. It's very helpful. And then as a follow-up, maybe, Steve, you mentioned -- you gave a little bit of guidance for Q2 loan production [indiscernible] kind of $400 million to $500 million range. The first quarter seasonally, usually are a little bit of a slower quarter, typically. Did $627 million, of course there was a, I guess, a bulk portfolio purchase in there of $135 million. But just, is that $400 million to $500 million being conservative or have you seen a slowdown in maybe the pace or is it just see fewer opportunities maybe for portfolio purchase in the second quarter?

James Pieczynski

This is Jim. I think the $400 million to $500 million is what we have communicated and that's based on the internal projections, quite frankly bringing it up from all the groups for the rest of the year. I think when you look at the first quarter, I think the first quarter was, quite frankly, an upside surprise for us where we kind of thought the $400 million to $500 million but we had, quite frankly, a lot of things hitting on all cylinders that put us in the position to be able to have a very solid quarter. And so, when we're looking at what do we expect for the rest of the year, we're kind of saying, okay, 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’re still comfortable with the $400 million to $500 million that we've communicated earlier. So that's why when we're sitting there saying where will we be, we have previously given guidance of $1.8 billion to $1.9 billion of new originations for the year based on the upside we had in the first quarter, we expect that to be above that, going forward.

Operator

The next question is from Steven Alexopoulos, JPMorgan.

Steven Alexopoulos - JP Morgan Chase & Co

Maybe I'll start to follow up on the discussion on capital. Could you just run through, while you're 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 dividend? Is it buybacks? Can you talk about how you're thinking about that while you wait for the charter?

John Delaney

Yes. The broad category -- I'll start, then Don. The broad category of things you do is buybacks, dividends, distributions, special dividends, kind of all of the above of the broad categories that we would consider done. I don’t think we can say specifically...

Douglas Lowrey

Other than the buyback we've announced so far.

Donald Cole

We have a buyback 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 just even discussed previously is we are, at this point, making new loans out of our Parent, so those are really our list of options.

Steven Alexopoulos - JP Morgan Chase & Co

Okay. On the $627 million of new loans funded in the quarter, how much of that was from portfolio purchases and how do purchases compare to last quarter?

Steven Museles

Yes. I think, well, in the first quarter we talked about the timeshare portfolio purchase, which was $135 million and then the multifamily, if you look at that, the total originations on the multifamily side were $287 million -- I'm sorry, $278 million in the first quarter and included in there was a large portfolio purchase of approximately $180 million. And the way that we look at it is the multifamily -- although we have an origination program with respect to the multifamily, we've also been able to acquire and where we've been able to get a significant amount of our growth in that portfolio is through portfolio acquisition. So if you look at that first quarter, it’s that timeshare, we had one timeshare portfolio purchase and the one multifamily purchase.

Steven Alexopoulos - JP Morgan Chase & Co

Okay. Maybe just one final question. A lot of banks this quarter talked about the competitive environment for loans, reaching what they're calling a frothy level, given where liquidity capital is for the industry. They're already seeing covenant-light loans out there. Can you talk about what you're seeing in the quarter from a pricing and covenant perspective?

Steven Museles

That's a really good question and I would say, what we're seeing and where we're seeing the largest level of competition right now is in the leverage finance i.e. the cash flow business. And you're right, you are seeing things that we are seeing in that space is a reduction of LIBOR floors, a lowering of the spread, covenant-light and lack of any kind of prepayment penalties. So what we’ve found is that’s probably been the most competitive area right now and if you -- we didn't do anything in the general cash flow space at all during the quarter and it was largely because of what you're seeing there.

We did, between our technology, between our other cash flow businesses, we have roughly $80 million that was spread between our healthcare, our security and our technology portfolios. But you are seeing -- just quite frankly, it's just become more 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.

Operator

The next question is from Moshe Orenbuch, Credit Suisse.

Moshe Orenbuch - Crédit Suisse AG

Given the importance of leveraging up the capital of the bank, could 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 the potential for larger portfolio purchases because I assume your origination guidance doesn't include large portfolio purchases. And I've got a follow-up after that.

John Delaney

Sure. Again, focusing on what we did in the first quarter, the Timeshare portfolio that we acquired was quite frankly an exciting acquisition for us because of the fact that it brought us 24 new borrowers. And the nice part about the Timeshare receivables portfolio is you typically have that -- that starts out as a revolving facility that ramps up and then kind of hyper-amortizes down, that's just typically the way that these are structured. And so 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 hyper-amortize down, but rather work a deal with the borrower to allow the revolving component to stay out, as opposed to having a loan that may be on our -- would ordinarily be on our books for 1 or 2 years, you can actually send this out and make it a 3 to 5 year deal. So we view that as a very, very opportunistic acquisition that gives us access to borrowers that we ordinarily would not have in. The timeshare space has been, I think one of our real high points for the last several quarters and we think there's a lot of opportunity there.

On the multifamily 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 Multifamily, 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 and so what we find is that the opportunities that arise on the multifamily side are a function of other institutions, that because of their capital constraints, need to dispose of some of their portfolios. And so that's where we're picking up loans in that space.

Moshe Orenbuch - Crédit Suisse AG

So I guess, could you just address the question of are there size limitations either in terms of the sellers or your appetite? Or size parameters that we should be thinking about?

Steven Museles

No. I wouldn't say there are size limitations at all. Particularly when you look at -- if you just 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 have projected during the year, the $1.8 billion to $1.9 billion, just on the capital availability that the bank has right now, we can do $1 billion 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. And so when we look at hold limits, we think of hold limits as it relates to an individual loan, but when, for example, the Multifamily obviously, there was a significant amount of loans associated with that and the same was true for the Timeshare portfolio. So the answer is no, we don't view size limitation as a gaining issue for us.

Moshe Orenbuch - Crédit Suisse AG

Okay. 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 being a sharp decrease. Is this something that you guys are looking at? Is it something that – I mean, do you have a perspective on whether that has an impact going forward?

John Delaney

We do look at that and we track that closely. And you're right, I think it was kind of a unique guidance that came out which is, "Hey, we're either considering a 1.5% net increase in reimbursement or an 11.5% reduction." So it's a pretty wide range and I think that’s part of the regulatory framework that healthcare facilities are operating in, where there’s this range that's always going to be there. The one thing that I would say though is that, 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 worried a little bit about now, we obviously have to study it, we obviously have to look at it, but the reality is even if you do have a slight change in reimbursement given where we're at in terms of debt service coverage, fixed charge coverage and our loan relative to the level of EBITDA, we ultimately will feel fine with it. Obviously it's new, what was proposed yesterday, so we've not done any hardcore analysis yet. But just looking at it and where we're at, we feel very comfortable with where we're at in the portfolio. And the long-term business in general has been very, very solid lately, as evidenced by the payoff of the Genesis loan that we had. So we feel very good about that space. Our portfolio has been very solid, but naturally, we'll need to look at the reimbursement impact.

Operator

The next question is from John Hecht, JMP Securities.

John Hecht - JMP Securities LLC

First one, and not to necessarily beat a dead horse, but going back to the bank holding company charter status. You guys now have a list it seems like of to-do actions. Can you give us a sense based on your perspective on the list of what type of delay, in terms of timing that, that might take to accomplish? And second, is there anything on that list that caused you to pause to say well maybe the bank holding company status is an optimal given the excess liquidity in our current framework?

Douglas Lowrey

The list is -- I don't think there's any surprises on there. No, put yourself in the fed's shoes for a second, right? They haven't made a new bank holding company for quite a long time other than in connection with distressed bank acquisitions. There's been a lot of new regulations and guidances come out. I think they're looking at CapitalSource, almost like a test case, kind of first new bank holding company with any level of complexity and activity with a Parent that they're considering and the standard is high and I guess I would acknowledge it’s perhaps a little higher than we initially thought. And 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. So what I would like to say -- I'd like to say we could do it in a year or even by the end of this year, depending on what actions we take. It's not something that I'm really comfortable at guessing at right now. So John or Tad, you may want to add something to that.

John Delaney

Well, as I said, I think our confidence in getting it is not at issue, it's just a question of to meet the end of the year time line, we'd have to do some things that would be painful. And it's not clear to us that those things make sense. So as we said balancing this in a way that we can accomplish our other strategic priorities for the company while also moving the conversion of the charter along as quickly as possible is what we're doing. So that's not as direct an answer as you'd probably like, John, but it's actually the truth in terms of how we're trying to make this decision.

John Hecht - JMP Securities LLC

I appreciate that. It seems very logical. Second -- and I appreciate that color...

Douglas Lowrey

Like for example. I'll give you an extreme example. If we sold every asset at the Parent and had a pile of cash, we'd be a bank holding company almost immediately, right? Obviously. We don't have to -- that's not as extreme as we'd have -- that's an extreme example. We don't have to do that but just trying to -- I'm trying to give you the dimension of the considerations here. And so those are the things we're kind of wrestling with.

John Hecht - JMP Securities LLC

I understand that given the context of the sell and current growth of the bank and the net income growth of the bank that you don't need to rush to do anything. So I appreciate that...

John Delaney

Yes, and the bank is doing great. There's not any dispute of any of those things, right? So, I think Steve made a very good point that should be – that I think is important and I think it puts everything in context, which is that other than the overnight deals that were done a few years ago, the only bank holding companies that have been created really since then have been ones that have been created as part of an assisted transaction. There haven't been a lot of business-as-usual bank holding companies created, if any. And so the regulators’ model for new bank holding company, as Steve said, is a high standard and it’s typically a standard more around not wanting significant activities at a Parent. Right? We still have a pretty big Parent with 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 top-performing levels. And so those are the things we could pull some levers to make that happen quickly but it might delay other priorities. I don't know, Tad, if you want to add anything to this.

Douglas Lowrey

No, there's nothing I could add. I think you covered the whole waterfront there.

John Hecht - JMP Securities LLC

The second question is to Tad. 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 all because you just expect pre-payment activity to normalize or can you shed light on what's happening in the core margin x-pre-payment fee income?

Douglas Lowrey

Yes, 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 we have a competitive market like that and someone described it as frothy, you look at where they're coming from and we're not participating in that market in the cash flow space. So as a result, a lot of these pre-payments were in the cash flow space. And these are loans with pretty good yields. But in the one-time, we're getting huge amounts of discount recognition, fee income recognition. We're estimating that as the main change going forward but as these higher interest rate loans pre-pay and we continue to build the portfolio with lower-interest rate loans, we see the margin declining there, we don't see anything on the cost of funds side unless interest rates change. So the main driver would be the lack of the pre-payment income. But if that stops it means the pre-payments would stop as well and we should see better loan growth. And the shrinking margins, just as a result of adding multifamily and SBA loans and new loans at market rates, at current market rates, will cause some minor compression. But the bulk of it is the one-timers.

Operator

The next question is from Mike Taiano, Sandler O'Neill.

Michael Taiano - Sandler O’Neill & Partners

I just had a couple of questions on the loan growth. I guess, Tad, I thought you said -- maybe I wasn't clear, did you lower the 10% to 15% net loan growth guidance for the full year because of the repayments? Or is that the same?

Douglas Lowrey

We're actually at -- we think we're ahead of where we thought we would be on production and primarily due to the purchases, but absent the purchases, we're still on target. And we see some competitive factors there but they're primarily in spaces that 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's driving our lower expectation for portfolio growth.

Michael Taiano - Sandler O’Neill & Partners

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

Douglas Lowrey

No. Yes, I see what you're saying. No. We had a higher estimate previously. Our current estimate is between the 10% to 15%, which we still see as a pretty healthy number in this environment.

Michael Taiano - Sandler O’Neill & Partners

Okay. I want to make sure I understand what the Timeshare loans are. So who are you actually lending to? Is that to the actual consumers that are buying timeshares or the resorts that are selling them?

John Delaney

That's a good question and it's a good clarification. Our borrowers are the Timeshare operators themselves. So what happens is, the way that these loans are structured is we have a loan to the Timeshare operator and our loan is secured by the underlying receivables and our loan is structured as a revolver with the borrowing base, with eligibility requirements. So we don't have relationships or exposure, direct exposure to the underlying consumers, to the extent anything happens with respect to that underlying loan. That loan would then -- -- if it's non-performing, would be removed from the borrowing base and that borrowing base always 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're certainly higher than the rate that we're charging our underlying borrower. So you have in addition to the over-collateralization feature associated with the value of the underlying receivable, you also 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.

Michael Taiano - Sandler O’Neill & Partners

What's the pricing been like on the purchase 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, can you maybe talk about the accounting? And if you buy them at a premium, do you just amortize that premium over the life of the loan? Is that how it works?

Donald Cole

I’ll let you answer the question about competition -- so relative to the yield, so 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 are at 6.85%. And 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.

Douglas Lowrey

He asked a question about premiums, maybe you should clarify what we've been buying these at. We're not paying material premiums on these things, correct, Jim?

James Pieczynski

No, that's correct. We're buying -- we're not paying a premium. We are buying these generally at par or slightly below par.

Michael Taiano - Sandler O’Neill & Partners

And then just a quick last one. In terms of the capital deployment potential, could you just 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 your share buyback or dividend at this point?

Douglas Lowrey

Well, the senior secured notes do have a restricted payment bucket limit, and I don't have the exact number in front of me. It was around $150 million at year end and it grows based upon pre-tax net income. It's probably grew another $7 million or $8 million this quarter. So to go over that, yes, would require some further dealing with the Senior Secured Note holders.

Donald Cole

But the plan we put in place for our buyback plan would be earnings we'll have over the 2-year period. There'll be enough there in that time range for what we originally established. But because of the size now, if you want to go above that, you'd have to deal with the note holders once again.

Operator

The next question is from Don Fandetti, Citigroup.

Donald Fandetti - Citigroup Inc

Hi, John. I guess I'm having a little trouble understanding this balancing act that you're referencing on bank holding company status. It almost feels like there are sort of 2 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?

John Delaney

We think we can. I mean there are strategies we have that allow us to do that and we’re considering the, I guess, one way of putting it is the implications of that, but 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 as kind of a bit of a binary option and I don't think it's quite that. I wouldn't present it that way.

James Pieczynski

And I guess the other thing, just to kind of chime in relative to when you're looking at, I'll just say reducing the size of the Parent, the portfolio run-up at the Parent has been significant, which is what we want to happen. So, for example, if you look at our loan balance at the Parent drop from roughly $2.5 billion at the beginning of the quarter to $2.1 billion at the end of the quarter. So that portfolio is declining quickly, which is exactly the path that we're on, so I think there's a lot of natural run-off associated with it. And the question is do we or don't we have unnatural run-off and do we make that happen?

Donald Cole

And Jim, just as a reminder, obviously, with Genesis and we go below $1.8 billion the minute when the Genesis path hit on April 1.

John Delaney

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 the excess capital is an important consideration.

Donald Fandetti - Citigroup Inc

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

Steven Museles

On the stock buyback, when we announced the plan, we've indicated to people that we weren’t going to talk about the levels from an economic basis in terms of when we would be buying back stock. So the two things we look at in terms of buying back stock are one, is it within the internal kind of economic guidelines we have in terms of when we buy back stock; and two, there's a whole bunch of relevant 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 buyback, obviously.

So we don't want to -- as we've said in the past, we don't want to talk specifically about when we'll be buying back stock. But the 2 things have to line up. One, it's got to be at a price that we deem appropriate for the buyback plan. And two, depending upon things that are going on at the company, there's a whole bunch of blackout periods and et cetera.

Operator

The next question is from Bob Napoli, Piper Jaffray.

Robert Napoli - Piper Jaffray Companies

Question on -- you guys went through a process of having people look at your company. With a lot of banks struggling to raise, to grow loans, you guys have this niched lending business. I was wondering if you could just maybe go through and -- which of your lending products you feel you have a real sustainable competitive edge that would be attractive to others. The Multifamily lending doesn't seem as unique. I think that the equipment lending group you hired that you brought in is very well regarded. You've had -- historically healthcare has been an area that you guys certainly have had -- but I'm wondering if you could go through that a little bit on -- because it seems to me, and obviously, that your deposit base is retail, but it's not viewed as the highest quality deposit base so what you're bringing to the table as an entity and what investors would be investing in is your lending, your actual lending skill, I think, and I was just wondering if you could kind of go through that a little bit and what makes you unique there and what makes it sustainable.

James Pieczynski

Sure, Bob. This is Jim.

John Delaney

Jim, why don't I start very, very quickly and then turn it over to you?

James Pieczynski

Yes.

John Delaney

I think your question kind of had 2 parts to it. I think the first part, we don't view as a relevant part so just the second part in terms of the lending portfolio. I think I'll turn that over to Jim.

James Pieczynski

Yes. And I think, Bob, you hit on a lot of it. I think you could say what are the specialty areas where we really think we've got a good solid niche. The healthcare area is a huge area that -- and in that niche, we have 3 components to that. We have our healthcare real estate portfolio, our healthcare cash flow lending as well as our asset-backed, i.e., the revolving lending. And I think that's been a hallmark and a strength of our business since day one and I think that, 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 at standing at roughly $260 million that, that group's brought in and they started at 0, roughly a year ago. It's a well-recognized group. They've had a great track record and I consider that a very strong specialty group 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 also involved in the security business. Again, we've got a good niche team that operates in that space, they've known -- they've been in this space for years, and again I think that differentiates us. And then we also have our professional Practice Lending group, which we brought in which is, again, 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. And then in the cash flow area, where we've differentiated ourselves is by not being a generalist that just kind of chases all the big deals out there and buy pieces of those big deals. We have focused on the technology, the data centers and along with the healthcare and security that I had mentioned previously. But that's the niche that we're in and that's the focus that we have. So as opposed to trying to be everything to everybody, we are trying to be focused on the sponsors that we have our relationships with. And then the rediscount business that we have, I consider right now to be one of our significant gems in the portfolio. You've got a lot of people that have pulled out of that space and it's a space that we've been in for a while. It's been a historic level of strength for us. And we have had incredibly good credit performance in there and we think we’ve got a great opportunity. And then on the real estate side, we have got a team that is doing originations and has its relationships. Again I know a lot of people will sit there and look at CRE and say, "Well, what do you have that's different from the rest of the world?" Obviously, we think the context that we have are different. But again, that business would probably be looked at in a similar light, relative to other shops. So in summary, and then the final part of it is our SBA group which is, we do have a national origination platform for generating SBA loans. And the nice part about these SBA loans is we’re keeping everything that we originate, whereas the guaranteed portion, quite frankly, you could sell off at a significant premium if you ultimately decided you wanted to do that. We've chosen not to do that because we don't need the liquidity. But that is, again, another solid source 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 banking institutions out there, they've largely been focused on just the CRE space which limits their options.

Steven Museles

This is Steve. Just to add one more thing, just to clarify. So the re-discount business obviously includes the Timeshare business that we talked about earlier with respect to the portfolio where, I think we are like the premiere lender in that space. And then, I mean the other value is just having all of these platforms under one roof. They're all natural lending platforms and they are very diverse so just to add to what Jim said.

Robert Napoli - Piper Jaffray Companies

And one last question. The pace of decline in the corporate and the Parent assets has been pretty substantial, and obviously, you closed the Genesis, so the Genesis loan is gone. But what do you see from here? Do you see a much more 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?

Donald Cole

This is Don. I would say that, I think there's opportunities to continue to downsize. Obviously, the efforts to sell the European portfolio that were very successful in the sale of Genesis are large chunks. There aren't that many large chunks left out there. But for some of the comments John made on the balancing act, I think there are opportunities to continue to shrink. It has just 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.

Operator

The next question is from Joel Hawke, Wells Fargo.

Unknown Analyst -

Can you talk about the reserve adequacy in the parent? You've got, at least this quarter, reserves of 28% of NPL [ph] and last quarter it was 33%. How do you feel about that? Is there any part of that, that maybe is acting as a holdup from the regulator’s standpoint? What have your conversations been or what can you tell us with respect to reserve adequacy of the Parent relative to how the bank regulators look at it?

Steven Museles

I mean, obviously, Joel we're comfortable with our reserve levels at the bank. And you know, the regulators, obviously, when they come in, they look at our – both on the bank side and the Parent side, our methodologies and the methodologies are the same. And we've not heard any kind of issues with how we approach the reserve methodologies at the Parent or the bank.

Donald Cole

And I would say when you sort of look at the one ratio you cited, sort of the reserves to the NPLs, I believe. If you think about the way our credit approaches has worked and these loans that are significantly seasoned, we're often going to a charge-off mode before just a specific reserve mode when we have problems. So, if you think about our impaired book and I know this number is across the board. And I only have the 12/31 number, I apologize, but something like 40% of the impaired loans have already been marked down either through charge-offs or specific. So there's a significant amount of already charged-down amounts within the portfolio, and because the portfolio -- it's Parent admittedly is a high percentage of these stressed-on accruals, much of that is based upon those specific charges and existing charge-offs. So I think we feel pretty good about where the numbers are. I wouldn't say anything there is related to any conversations with regulators. I think it's just our typical methodology.

Unknown Analyst -

To wrap up, because it sounds like it's really more of a size issue from a regulator standpoint, than anything they see that you guys are doing or not doing.

Steven Museles

Yes. I think that's a fair assessment.

Operator

The next question is from Sameer Gokhale, KBW.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.

Just a few questions -- just to start off with a little bit of -- in terms of the provisionings at the Parent and overall. I used to provide an estimate of your cumulative losses on the legacy portfolio and 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 Cum[ph] losses on the legacy and what the charge-offs to-date have been there, just to help frame what we might expect going forward in terms of potential losses.

Steven Museles

I'd say our go-forward expectations haven't really changed. When we were producing that slide, the last time produced I think we were a little bit above the high end and we’d probably still be there. I think one of the reasons we stopped producing that was related to the de-consolidation of '06-A which made some of the numbers a little bit less relevant and a little more confusing. But if you think about it -- I'll go back to those '06-A bonds. I mentioned we recovered over $20 million in value on the '06-A bonds. In one sense, if those loans were still on our portfolio, that would have been some reversal of the reserves. We've also seen in our real estate book, Tad mentioned, one loan that we got paid off on where we had a recovery of about $12 million. So I think, we're seeing the turnaround in the cash flow book -- I'm sorry, in the real estate book. And when we think about the cash flow book again, we had a few of those outsized losses this time, as I discussed, and I gave you some color on sort of the shrinkage in the size of that portfolio, especially in terms of the large credits. So, I think that is what leads to our view that this was something of an outlier in our recent past in terms of the level of the provisions that we expected to go back down to where it was if not somewhat below in the going-forward quarters.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.

That's helpful. Thanks for clarifying . I realized that the de-consolidation had an effect and I was just kind of curious about the x-that and 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 just trying to – I was a little confused here, trying to figure out during the quarter, if I were to just sort of strip out, you had this evaluation reversal at the bank and then some additional evaluation allowance at the Other Commercial Finance. And if I'm thinking of this correctly but on a net basis relative to what your tax would have been, say the 40% tax rate, is it safe to say that the net effect of additional charges you took, that was about like $5.5 million roughly. Is that the right way to think about it?

John Delaney

I mean if you're just trying to do the basic math off pretax GAAP and tax expense, the way I think about it is this, Sameer. 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 re-consolidated, and that was all put on our Parent’s side. If you look at the banks, and the reason why the bank’s 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 at the Parent. So the Parent reversed some of -- or added some additional valuation allowance relative to the bank's Federal, and just simply reversed its state which almost accounts for the entire amount of tax expense in the quarter versus where you might have thought we would have been around the 0%. So 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 but it's really largely the tax expense this period was based upon putting back up some valuation allowance for the bank's Federal DTAs that the bank as a standalone taxpayer didn't need to have at 12/31 2010.

James Pieczynski

And as I mentioned, Sameer, just while you're modeling it, the amount that we expect to hit in 2011, we'll expect a similar amount in the second quarter, but then that will be the end of it for the year and it's based upon sort of a detailed model of when some of these things reverse but ultimately we expect to put a similar amount up in the second quarter and then back to the closer to 0 that we would have anticipated for third and fourth quarter.

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.

And then just the last one, has there been any further serious thought given to just spinning off the Parent relative to the bank, and maybe if that might help solve your ability to get some sort of regulatory approval. I mean, you're seeking this bank hold co. status, but if you spin off the hold co. then there's no hold co. status to seek. And maybe you could get all those benefits within your bank's serve itself. Is that something you're seriously considering at this point or is that just something that's off the table completely?

John Delaney

Listen. I would say that -- you said 2 things there. Seriously considering it off the table. I think it is certainly not off the table and I would say we're seriously considering all options to accomplish the priorities that we outlined and clearly the way you framed it something like what you’re talking about would certainly help in balancing those 2 priorities.

Operator

The final question today will be from Henry Coffey, Sterne Agee.

Henry Coffey - Sterne Agee & Leach Inc.

In real simple terms, has anything occurred in this quarter that would roll forward at the likely date of when you recapture the DTA? And what were your state taxes -- or what would your state taxes on a GAAP basis be per quarter, if you could throw out sort of a general number?

John Delaney

So Henry, a couple of things. I would say what we said on the DTAs, we need a period of sustained profitability. Obviously, this profitability is not as significant as we would have forecast coming in. So I could say that, 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 rules are a little bit tough to predict. I think what we have said is we don't expect anything before the end of this year. So depending on what happens in the next 3 quarters, we'll have to see how that plays itself out. But I would say, sort of on a net basis on the margins, slightly more conservative on that estimate. And on the second question on our state tax expense, again, we have a lot of state NOLs for the Parent Company, consolidated company. But there are places where we file individually so there are places where the bank files still a separate tax return in different states and we'll likely have some tax expense. It's a pretty small number and I don't have a specific number in front of me. My sense is it's in the $1 million or $2 million range, but I can confirm that for you. But it is a pretty small dollar number.

Operator

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

Dennis Oakes

That's it. Thank you, everybody. Have a nice day.

Operator

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

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