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CapitalSource (NYSE:CSE)

Q2 2011 Earnings Call

July 29, 2011 8:30 am ET

Executives

Donald Cole - Chief Financial Officer

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

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

Dennis Oakes - Senior Vice President of Investor Relations

Analysts

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

Moshe Orenbuch - Crédit Suisse AG

Donald Fandetti - Citigroup Inc

John Stilmar - SunTrust Robinson Humphrey, Inc.

Michael Taiano - Sandler O'Neill + Partners, L.P.

Scott Valentin - FBR Capital Markets & Co.

Steven Alexopoulos - JP Morgan Chase & Co

Jeff Davis - Guggenheim Securities, LLC

Mark DeVries - Barclays Capital

John Hecht - JMP Securities LLC

Operator

Good morning, and welcome to the CapitalSource Inc. Second Quarter 2011 Earnings 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, Andrew, and good morning, everyone. And thanks for joining the CapitalSource Second Quarter 2011 Earnings Call. On the call this morning are Executive Chairman, John Delaney; Co-Chief Executive Officers, Jim Pieczynski and Steven Museles; CapitalSource Bank President and CEO, Tad Lowrey; and Chief Financial Officer, Don Cole.

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 also have posted a presentation on our website earlier this morning, which provide 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 press 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 finally, more detailed information about risk factors can be found in our reports filed with the SEC.

John will begin our call this morning, and following Don's remarks, we will take your questions. John?

John Delaney

Thank you, Dennis, and good morning, everyone. We're happy to be here this morning, particularly since this week marks the third anniversary of the launch of CapitalSource Bank, which is something that we're all celebrating around here this week and very pleased about.

When we announced our first quarter earnings in April, we indicated that we had 2 strategic priorities. The first was preserving and returning capital to shareholders, and the second was to convert the charter of CapitalSource Bank to a more traditional California-chartered commercial bank. We also said those objectives needed to be balanced or sequenced in a fashion that would create the greatest value for our shareholders. Over the past 3 months, our management team and Board were engaged in an extensive and thorough evaluation process designed to determine how to best achieve those goals. Specifically, we examined 3 options, each with the aid of an outside financial adviser to make the process as rigorous as possible.

First, selling Parent's assets in bulk. Second, potentially splitting the Parent and bank into 2 separate public companies, a bank and a business development corporation that would focus on non-bank lending activities. And third, essentially staying the course from a structural and asset perspective but letting Parent assets run off naturally while paying down debt and aggressively returning capital to shareholders. While finding a way to pursue our 2 primary strategic priorities simultaneously would have been ideal, the options that allowed us to do so involve significant complexity, uncertainty and delay. The Board concluded that the course of action in the best interest of the shareholders is returning all of the Parent's capital to shareholders in a form of either stock buybacks, which are arguably really an investment in the company, and/or dividends and that we should begin pursuing this path immediately. The decision to return Parent capital to shareholders was the preferred path because it creates, in our judgment, the most shareholder value and involves the least risk, even though it will extend the timeframe for conversion to a commercial bank charter.

Parent Company capital represents over half of our total capital, as about 45% of our capital is in CapitalSource Bank. We are committed to returning all of the Parent capital to shareholders, though that course could -- though, of course, we could adjust that decision if attractive and high-returning opportunities creating more value for our shareholders were to present themselves. Considering the high level of bank capital, which we would put to work as our first priority, we do not foresee opportunities at this point that would utilize the Parent capital.

Since we are planning for the Parent Company to ultimately become a regulated bank holding company, we are sensitive to the need to maintain appropriate levels of capital and liquidity. As a result, we conducted a capital adequacy analysis, including stress tests focused on our capital and funding needs before the Board authorized the first step in our capital deployment plan. Based on that analysis, the Board has increased our share repurchase authority to $185 million, $10 million of which was utilized last December. We chose this level because $175 million is the restricted payment capacity we currently have as of June 30 under the terms of the senior secured notes. It will take us time to achieve the first phase of share repurchases so we intend to immediately begin actively buying back our shares consistent with market conditions and subject to applicable legal, contractual and regulatory constraints.

The Parent Company has been shrinking rapidly over the past 2 years. Our debt has declined by approximately 75%, and total loans at the Parent have declined by close to $5 billion to approximately $1.4 billion at June 30, which includes $611 million loans held in our non-recourse securitizations. Our Parent Company liquidity improved substantially during the same period, growing to nearly $1.2 billion at the end of the second quarter, which is roughly equal to our total recourse debt, which includes $440 million of trust preferred securities, which do not mature for nearly 25 years.

In a nutshell, the Parent has extremely high capital levels, exceptionally good liquidity and a rapidly shrinking loan portfolio, which is already relatively small, considering the size of the whole enterprise and its capital base.

To provide a little more color, the average quarterly decline in the Parent legacy portfolio over the past 3 quarters has been $500 million, including the $325 million Genesis mezzanine loan, which paid off in the second quarter. We expect that loans held by the Parent will continue to decline steadily over the next 18 months and consequently believe we will preserve the most shareholder value by letting those assets run off naturally rather than disposing of them in some kind of a bulk sale.

Our Board will assess the sufficiency of Parent Company capital on a regular basis. To the extent that declining loan balances and improving liquidity trends continue, we expect there will be a steady stream of available capital to return to shareholders beyond what we're announcing here today. In fact, our consolidated equity ratio of 22.6% at June 30 is materially higher than most banks as the national average at 3/31 was just 11.2%. As a result of our decision not to accelerate the disposition of Parent Company assets, we do not expect to file an application for bank holding company status for at least 18 months. That delay, however, should also simplify the Federal Reserve review process when it does occur. We would be applying once the Parent company's balance sheet is greatly simplified with relatively little debt or assets -- or loans, for that matter, outstanding.

While our decision to accelerate the return of Parent capital to shareholders, we are nearing the end of the transition of our business to a traditional banking model with its unique feature of a national origination platform married with a regional depository. CapitalSource Bank is already growing when most other banks are struggling to show net loan growth, so we feel very good about the strategic path we have chosen for the next 2 to 3 years.

As Jim and Tad will explain in a minute, the second quarter financial performance was very positive across-the-board. CapitalSource Bank continues to be highly profitable with a net interest margin last quarter in excess of 5% and after-tax return on average assets of 1.8% and a return on average equity of 11.5%, which must be viewed in the context of the bank's nearly 19% risk-based capital level. As Don will explain, the Parent Company Other Commercial Finance segment showed improved credit performance with total loans declining by $673 million, while liquidity improved by approximately $485 million in the quarter.

Jim is up next. Jim?

James Pieczynski

Thanks, John, and good morning, everyone. As John mentioned, management team and our Board of Directors spent a considerable amount of time looking at numerous options to best achieve our strategic goals for the company, which were, number one, returning Parent Company capital to shareholders; and number two, converting CapitalSource Bank to a commercial bank charter. We wanted to do this while maximizing the growth and profitability of the bank while also preserving the value of our substantial deferred tax asset.

With those objectives in mind, there were 3 principal paths which we considered extensively. First path was the bulk sale of Parent Company loans, which would have rapidly shrunk the remaining legacy loan portfolio while also reducing the level of classified assets. Although it's difficult to predict how quickly or successfully a bulk sale might have been concluded, we believe that such a sale would've resulted in less proceeds than we would receive in a normal course runoff of our assets.

As John mentioned earlier, our average quarterly decline has been roughly $500 million. Our current balance is roughly $1.4 billion, so we expect the assets to run off naturally over the next 18 to 24 months.

A second approach that we considered was moving most Parent assets and debt into a separate company, specifically a publicly traded BDC that would be a tax-efficient structure for the assets and also a new business for our shareholders that would be complementary to CapitalSource's current bank lending platform. We determined, however, there were a number of complexities and significant level of risk and uncertainty associated with such a scenario. In addition, it would've taken a significant amount of time to accomplish this and would've delayed the return of capital to shareholders. So with this, we concluded that the cleanest, simplest and quickest method of returning capital to shareholders was via share repurchases and/or dividends. We felt that this strategy had the fewest constraints beyond our direct control and therefore was a decidedly low-risk strategy. This is the path we have chosen, and as John indicated, we will begin to execute that strategy quickly through our share repurchase program.

One of the questions that you might all want to ask is why didn't we purchase any stock during the second quarter, and the reason is that we, given the fact that we were -- that we were looking at the various strategic alternatives, which we consider as material nonpublic information, we felt the more prudent course of action was to not effectuate any share repurchases during the second quarter. Now that we have completed this process, we feel comfortable proceeding with the share repurchase program. I also want to mention that, although this will slow down the timing for the change of our bank charter, we are still committed to pursuing the charter change, and as Tad will explain, we expect this to have no impact on our current business plan.

Before turning the call over to Tad, I want to speak a little bit -- we'll talk about the bank's performance. I want to focus on our loan originations for the quarter, which were again above our expected quarterly range of $400 million to $500 million. Although new loan production will fluctuate from quarter to quarter, we are particularly pleased to have closed just under $550 million of new loans in the quarter. This follows the first quarter production of $625 million and brings our total for the year to nearly $1.2 billion. The largest concentrations of new lending in the quarter were in the healthcare, real estate and multi-family sectors, but technology, healthcare cash flow and equipment finance were also substantial contributors. For the 6-month period ended June 30, these 5 groups, along with our rediscount platform, were our leaders in loan production. New loans in the quarter had an average all-in contractual yield of 6.4%, excluding multi-family and small business loans, which have preferred capital treatment but lower yield. The remaining new loans in the quarter had a 7% all-in yield.

I'm proud to say that we have built out our lending platform over the past 18 months. We've recently repositioned some of our origination teams with new management in order to take advantage of market opportunities and to maintain a competitive edge in our specialty product line. Three new businesses were added last year, which are equipment finance, small business and professional practice lending. Together, they've accounted for over 20% of our loan production over the last 4 quarters, showing that they have been substantial contributors. As I've said before, we are continuing on the lookout for new origination platforms as we believe that will continue to strengthen our lending franchise.

I also want to point out that our pipeline remains robust, and given the year-to-date originations, we now expect full year loan production to top $2 billion, which would represent 25% growth from our originations last year. Despite having runoff for the bank's portfolio, we also remain comfortable with our full year expectation of net loan growth at the bank of at least 10% to 15% and possibly higher as our loan growth has hovered around 5% for each of the last 2 quarters. I also want to point out that we have not originated loans at this level for in more than 4 years. But what's more significant than the amount is the fact that we have done it with smaller hold sizes and subject to a bank regulatory environment. This is also done in an economy that is recovering from a deep recession, for most banks are struggling to originate assets and are challenged for loan growth.

The success we are having originating new loans against this backdrop reflects the quality of the people we have in place, most of which has been here for very long time. And it substantiates our firm believe that we have built an exceptionally resilient and broad-based national lending franchise that should only continue to grow and prosper as the economy recovers. With our strategic direction now clarified and our originations engine operating on all cylinders, this is an exciting time to be a part of CapitalSource.

I want to personally thank our employees who have worked hard to steer us through the financial crisis and emerge in a strong, competitive position with enhanced financial strength. In addition, as Tad will explain, we have a growing and highly profitable bank, which is the future of our company.

Tad?

Douglas Lowrey

Thank you, Jim, good morning, everyone. We had a very good second quarter at the banks when the second quarter of CapitalSource Bank was solidly profitable. We had improved credit performance, net loan growth, our deposits increased, capital position strengthened, and we had a return on average assets above our expected range. Despite the elevated level of loan payoffs and sales at the bank, we had net loan growth of $189 million or 4.7% in the quarter. Total bank loans at quarter end now stand at $4.2 billion and represent 75% of the total consolidated loans.

Because our capital levels are so high at this point, we actually view the bank's return on average asset as a better gauge of our earnings power than return on equity. Our fully tax return on assets in the second quarter of 1.78% was well above our projected range for the year of 1.25% to 1.50%. The bank's credit performance improved significantly in the quarter. As a result, our loan loss provision was actually a reversal of $1 million compared to an $11 million addition to reserves in the first quarter and $5 million one year ago. Charge-offs were elevated at $23 million compared to a net $3 million in the prior quarter, which included a recovery of over $12 million. Non-accrual loans at June 30 actually increased to $220 million from $175 million at March 31, with that increase relating to one legacy real estate loan, which we added to non-accruals. And to get a more accurate picture of where we think credit stands today, you have to consider our largest hospitality loan at $107 million. We've been working on disposing of that loan for quite some time, and the sale actually closed on July 1 for cash. This was the largest remaining hospitality loan in the portfolio. It was on non-accrual, and it was impaired, so the sale improved our credit metrics across-the-board, and we also sold it at a small gain relative to our written-down value. The pro forma for that sale, or allowance for loan losses as a percentage of non-accruals, increased from 76% at March 31 to 97% on July 1. More importantly, total non-accruals now stand at $113 million or only 2.7% of loans. Likewise, our nonperforming asset ratio, again pro forma, is 2.6%, which we believe is below the national average for banks with similar size.

Turning to the balance sheet. Loans originated since our inception 3 years ago now represent 76% of the total loans in the bank, pro forma again for the July 1 sale of the legacy loan. And so far, the credit performance of these newly originated loans has been outstanding. Several quarters now, we've said that the cost of our interest-bearing liabilities would flatten, so in fact, in the second quarter we had a 1 basis point decline, 1.21% was that cost, while our cost of deposits declined by 3 basis points to 1.13%. Deposits continued to grow, with the primary source there being retail CDs and average rate below 1%. Deposits grew by $77 million in the quarter, bringing our total to $4.8 billion. Looking at the forward LIBOR curve. We think this low interest rate is going to persist, which should allow us to keep our total cost of funds very near to current level for the remainder of this year.

Before I turn the call over to Don, I want to talk a little bit more about our decision to defer the application for bank holding company, which will ultimately delay CapitalSource Bank's conversion to a commercial bank charter. We have said on a number of occasions, the benefits accruing from this commercial charter would have very little short-term impact. It is important to reiterate that our current charter, California Industrial Bank, is very efficient particularly when interest rates remain as low as they have. So as a result, even if we were able to obtain bank holding company status tomorrow, we don't -- we think it would have almost no impact on our growth and our profitability in the bank over the next couple of years. Clearly, the commercial banking charter does have its benefits, and that's still a very important priority for us: the ability to offer more products, particularly our business customers, and to make acquisitions are tools which will ultimately strengthen our core franchise.

However, what's already in place and what distinguishes us today is our national origination platform, which operates along 12 distinct specialty business lines. As a result of this, we remain confident in our ability to produce net loan growth at a time when many other lenders are unable to do so.

Don will now conclude the prepared portion of the call with an overview of the second quarter consolidated financial performance. Don?

Donald Cole

Thank you, Tad, and good morning, everyone. On a consolidated basis, the second quarter was a story of continuing progress in 4 key areas that have shown steady improvement over the last year. Those 4 areas are credit performance, Parent Company liquidity, reduction in the Parent Company legacy portfolio and sustained consolidated profitability.

Starting with credit. On a consolidated basis, total non-accruals, pro forma for the hospitality loan, which we sold on July 1, as Tad mentioned, declined to $364 million, which represents a 25% drop from the March 31 level and a 48% drop from the December 31, 2010, level, meaning roughly half of the $700 million of non-accrual loans we had only 6 months ago are now gone. Net charge-offs during the quarter were $86 million compared to $91 million in the first quarter and were concentrated in legacy cash flow and commercial real estate lending, together accounting for 92% of the total. Trailing 12-month net charge-offs declined by 12% on a consolidated basis, which is another good sign of stability and improving trends. We released a total of $41 million in general reserves, offsetting new specific provisions of $43 million, about 2/3 of which were related to just 3 loans. We had $199 million of consolidated loan loss reserves at June 30, representing 3.55% of total loans. Though falling, our current total loan loss reserve percentage is still significantly above pre-crisis levels, so we expect that it will continue to decline over the next 12 to 24 months.

The improvements in Parent Company liquidity and the reduction in the Parent Company legacy portfolio go hand-in-hand. John highlighted the rapid reduction in the Parent Company portfolio. That has corresponded with significant increases in liquidity and reductions in debt. Our unrestricted cash balance at the Parent grew during the quarter by $485 million to $1.2 billion. Earlier this month, we utilized $281 million of that amount to redeem the 3.5% and 4% convertible debentures at par. Even after that payment, however, our liquidity remains at a very comfortable level of over $900 million. The next scheduled debt payment is not until July 2012, when the 7.25% convertible debentures, with a total face value of $250 million, are redeemable.

We also continued to reduce our level of securitized debt. Debt paydowns of $167 million, including the entire remaining balance on the 2007-2 securitization, reduced third-party securitization debt by almost 30%. With the repayment of the 2007-2 debt, we now have approximately $790 million of non-securitized Parent loans from which we will retain all future interest and principal payments. These payments will contribute to the continued level of ample liquidity at the Parent.

I am very comfortable therefore with our ability to execute our return of capital strategy in a timely and efficient manner. As Parent loans and debt continue to decline, and liquidity grows over time, our Parent balance sheet will become an increasing source of strength for CapitalSource Bank. To ensure that result, we will continue to carefully manage the wind-down of the Parent as we position the company to apply for bank holding company status in advance of converting CapitalSource Bank to a commercial charter.

Operator, we're now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Mike Taiano of Sandler O'Neill.

Michael Taiano - Sandler O'Neill + Partners, L.P.

Just had a question on the capital returns. So the $185 million of share buybacks, was that basically what's allowed under the waiver with the senior secured notes? And on that topic, just curious as to when you may look to address that from potentially a prepayment standpoint. Are you planning to get through the $185 million? And then, what the options are, or could you do that potentially before then?

John Delaney

This is John. So the first part of your question is, yes, that's the amount that's allowed under the notes, the amount that we've announced here today. As far as the rest, I mean, it's -- I hope we made this clear. We're completely committed to returning all of the Parent's capital to our shareholders and to do that in as efficient and quick a manner as possible, absent, of course, of some other opportunity arising. There might be a higher-returning opportunity, which we don't foresee for the Parent's capital. So we're fully committed to that, and we want to do it as quickly as possible. And we'll be addressing all of the implications of how we intend to do that and what other investments we'll make with our capital to facilitate things as the time requires. But right now, we're just focused on the amount that we've authorized today. That'll take us a little bit of time to get through, and then we'll get on to dealing with the rest.

Michael Taiano - Sandler O'Neill + Partners, L.P.

Okay, and the buybacks will depends like on sort of the where you think the price is attractive. Or does that really not weigh in to the timing of share buybacks?

John Delaney

Well, look, returning the capital to shareholders is the priority, and we're defining stock buybacks as a return of Parent capital. It's technically not that, it's really an investment in the company, and it's a utilization of the Parent capital. But broadly speaking, if you -- assuming that buybacks and dividends both were to be under the category of returning capital to shareholders, we intend to do that. And obviously, since it's a fair amount of capital return, we'll make what we think is the best investment decision for the shareholders as we go, which could include doing all buybacks. It could include doing some combination of buybacks and special dividends, et cetera.

Michael Taiano - Sandler O'Neill + Partners, L.P.

Okay. And then just a separate question on the loan volume at the bank. So I guess, 2 separate questions. Looks like the asset-based portfolio was down quite a bit in the quarter. Just curious if that was something where that market has gotten more competitive from a pricing standpoint? And also if you could just tell us, in terms of the originations in the quarter, how much were organic versus asset purchases?

James Pieczynski

Sure. Relative to the change in the balance, we actually had a significant number of cash flow loans that we were able to originate in the quarter and especially in the technology and healthcare cash flow lending side. I think, in terms of the decline, that was really a function of being able to dispose of a significant amount of our legacy cash flow loans both through natural runoff of the assets as well as some selected asset sales.

Michael Taiano - Sandler O'Neill + Partners, L.P.

Okay, you mean asset-based or cash asset-based? Is that what you meant?

James Pieczynski

Right -- I'm sorry, yes.

John Delaney

Yes.

James Pieczynski

And what was your second question?

Michael Taiano - Sandler O'Neill + Partners, L.P.

Just the mix of the originations versus the purchases?

James Pieczynski

Yes. And our total originations for the quarter, as I said, were just under $550 million. Of that, roughly $30 million of that represented purchases from portfolios. The rest of it were all internally originated loans.

John Delaney

Well, a little more than 5% were purchases.

Operator

The next question comes from John Hecht of JMP Securities.

John Hecht - JMP Securities LLC

Considering that the overcapitalization of bank is statistical basis, how should we think about the potential return of capital to shareholders over time in the non-bank segment? You mean, is it the total equity plus any potential excess reserves plus, I guess, the DTA allowance? I mean, is all of that at the near to be returned over time? And how do you, I guess -- you understand there's some covenants to consider, but ex the covenants, how do you determine when to return this capital?

John Delaney

So I think the answer to the first part of your question, John, is yes, meaning the things that you included in kind of framing what's -- the Parent capital, we all of view as available and intended to be returned to the shareholders. In terms of how we make that decision, as I said earlier, our plan is to really get on with this and to start having the capital flow back quickly, which is why we announced increased buyout approval today and announced our intent to immediately begin buying back stock. But it's a lot of capital return, as you correctly point out. So I think, on an ongoing basis, we'll be making what we hope is the right investment decision for the shareholders as to whether that capital should be utilized for stock buybacks or whether that capital should be utilized to pay out dividends, whether they be special dividends or other enhanced dividends to the shareholders. And that'll be an ongoing investment decision that we can only really make at the time we're ready to return chunks of that capital based on factors that will exist at the time, including obviously the price of our stock. And as it relates to other debt, clearly the Parent's balance sheet will liquidate entirely as we do this, and we'll be looking at our debt securities while we're doing this and making the right investment decision for the shareholders there, as well. So that's probably about all the detail. It's a long road because there's a lot of capital to return, so it's hard to comment on the nature of each kind of turn in that road, if you will, other than to say we're committed to returning it all, and we define it the same way you do. It will take time to do. And it's likely to take different forms. It may all be buybacks, but it may be some combination of buybacks and dividends, as well.

John Hecht - JMP Securities LLC

Okay. And forgive me if you guys explained this in the call, I didn't catch it. There looked like there was a higher than the least -- where we expected the tax rate could be and that some of that was incurred at the bank. Is there some true-up of taxes going on there? Or was this a sustained tax level that we should model going forward?

John Delaney

There's a little bit of true-ups. So, let me break your question in a couple of components. First, when you talk about the bank, the way you should expect the back to look going forward is like a full taxpayer. The bank, on a standalone basis, no longer has a DTA allowance. It provides for taxes as if it were a normal taxpayer. The distinction is it will then expect to pay its taxes to the Parent to utilize the Parent's tax attributes, which should drive you to expect the overall tax expense on a consolidated basis to be closer to 0, which would mean the Parent would essentially have a credit for what the bank has a debit for, an expense for. That's not the case this period. But you may recall, last period we had about a $11 million tax expense related to the reconsolidation of the Parent and the bank and some reestablishment of allowance against what was previously an unallowed-against bank DTA. I suggested at the time when we have a similar number this quarter, which should have brought us in around that $11 million or low-teens number. We were a little higher than that. What I should point out about being higher than that and one of the vagaries of the tax rules for GAAP is, even though we had an expense, we were able to actually still accrete some of that to book value in a way that doesn't go through the income statement. So you'll see our book value per share went up much more meaningfully than what our just net income provided for. So if I sort of get a pro forma in my mind, net-net we had about a $10 million increase to book value relative to tax that went straight to the equity line. So if you netted that out of tax, you'd really have an expense closer to the $7 million level. Having said all that, if you look forward, I think, what we suggested at the end of the first quarter, what I think remains true, is that this whole step-up relative to this reconsolidation for this year should basically be done this quarter. And the third and fourth quarters should return to that more expected low level, knowing that we do have some other foreign operations, some other things that will create some tax noise, but we expect it to reduce back down to where you should look for it, somewhere in that 0 range, maybe with a small single-digit positive. And then that should be how we go the rest of the year. And when we get to the end of the year, as we've said before, that's when we need to again refocus on just the reversal of the entire DTA allowance where it will create a lot more noise going forward. But I think, as it relates to this second quarter blip-up, you should not expect to see it recur next quarter or in the fourth quarter.

Operator

The next question comes from Don Fandetti of Citigroup.

Donald Fandetti - Citigroup Inc

John, I just wanted to clarify, are you saying that you would or would not buy back the $300 million senior secured, if that's still on the table?

John Delaney

Yes. Everything -- I think what I was saying is everything's on the table.

Donald Fandetti - Citigroup Inc

What is sort of the pluses and minuses that you think about with that potential move? I mean, it seems to me like you take a little book value hit but you'd be able to return significant, more capital in a more rapid fashion, so is...

John Delaney

Yes, I think you're analyzing it appropriately.

Donald Fandetti - Citigroup Inc

Okay. And secondly, the second question I had, John, you sort of left the door open a little bit on the legacy book to -- if you saw some attractive opportunities. I thought that was an interesting comment because it kind of leaves the door open to still be active in sort of a non-bank arena. Can you clarify what you really mean by that? I would think that you would want to just be in rundown without sort of that qualifier.

John Delaney

No. I'm glad you asked the question because I don't want there to be any misunderstanding there. The -- we have no intent of reengaging any kind of lending activities at the Parent. That was part of our analysis, really trying to make a decision, should we do that, and if so, perhaps, do it buy spinning off another company, and we've decided not to do that. So our clear intent is to run off all the Parent's assets and return the capital to shareholders. However, let's assume an incredibly attractive bank acquisition opportunity were to arise between now and when we have returned all the capital to our shareholders. We may elect to not return Parent capital to shareholders and to invest that capital in CapitalSource Bank if it were to need that capital to do an acquisition. That's really what we have in mind when we kind of caveat our commitment to return all the Parent's capital to the shareholders. And then to say it maybe more specifically, if the bank were to pursue -- would to were to have available to it an opportunity that was very attractive and high-returning and required capital beyond its capital base, and we had excess capital to Parent, we might choose to make that investment rather than continue to return that capital of Parent's. So that caveat was put there just because, I think, it's an obvious and logical thing to say, because in the course of returning all of Parent's capital, which could take some time, clearly we could change courses based on an opportunity like that. But you shouldn't conclude that we have any intention of reengaging in lending activities at the Parent or starting any kind of new lending business with the Parent. It is in rundown mode. The intention is to return that capital to the shareholders. My only caveat was around if CapitalSource Bank needed the capital. Jim, I don't know if you want to add anything to that.

James Pieczynski

Just to further clarify that. All our loan originations are done at the bank level. And that's going to -- that's been the way we've been, and that's the way it's going to continue to be. So all loan originations will be at the bank.

John Delaney

Yes. Thanks for asking the question, because we don't there to be any misunderstanding on that point. It's just, whenever -- the prudent thing for a management team and Board is to announce returning its capital, but we're also supposed to be exercising our judgment. So if some were to come up with the bank, we would obviously reconsider that. That's really more the point.

Operator

The next question comes from Moshe Orenbuch of Crédit Suisse.

Moshe Orenbuch - Crédit Suisse AG

In the similar vein, could you talk a little bit -- because you kind of alluded in your remarks to the idea that the ROE of the bank is kind of constrained by the capital base and you're originating, obviously, at a premium level compared to most other banks out there. So it doesn't appear that you're going to be able to get to a reasonable leverage ratio just by originating loans. So could you talk a little bit about that strategy? And it kind of relates to the comments that you just made a little of.

James Pieczynski

Well, I mean, if you look at the bank and you look at the bank capital levels, the bank as of today could originate literally $1 billion worth of new loans and still be in compliance with all of its capital requirements. So in addition to the 12 lending platforms that we have in place, we are going to be continually looking for portfolios that we can acquire in addition to any acquisitions that are out there and also focused on bringing in new origination teams. So the way we look at it is having that excess capital at the bank is something that gives us the opportunity to be able to look at these different avenues that are out there. And as John said, when we looked at the bank, and we've looked at it under many scenarios, we think it would be less likely that the bank would need capital in order to do any of this. But again, we'll kind of want to keep that possibility open in the event that, that need was there.

Moshe Orenbuch - Crédit Suisse AG

Okay. And in terms of the fact that it is -- you did mention kind of the 3-year anniversary. Is there a time at which they would reevaluate that capital requirement? Is that a relevant constraint at this point?

John Delaney

Tad, you want to answer that?

Douglas Lowrey

Yes, there is a time. We think it will be a combination of 2 things. One, when we file our application for the charter change. We're almost certain we can get a reduction then, and the reduction would be contingent on what our balance sheet looks like then and what our stress test looks like then on our loan portfolio. If you look at the loan portfolio at the bank as opposed to what it looked like when the $2.2 billion of legacy loans came in, the average risk rating is lower the average size is significantly lower, and the mix of assets in lower-risk asset classes such as SBA, multi-family, equipment, finance and ABLs is much higher than it originally was. So we're highly confident that we will show our regulators at the bank level a much less risky balance sheet particularly in the loan portfolio with high levels of capital. But despite those facts, we think it will be difficult to achieve a lower risk-base capital level until we change the charter. However, there was one benefit to the 3-year anniversary, and that is that we are now at a tangible capital level, which is kind of academic for us because most of our loans are at the highest risk weight, which is the limit to our capital. But we did have a separate 10% tangible core capital requirement that went away, so now we're subject to the same capital requirements as other banks. To follow up on your point earlier, though, about the return on equity at the bank, we now have another option we did not have. The Parent Company obviously doesn't need capital. John pointed out there's excess capital at both locations. However, starting next year, the bank will be able to pay dividends to the Parent Company should we choose that route. We haven't had that route available to us before. But we think what will happen is a combination of 2 things. We'll continue to grow at the bank and lever that capital, and the regulatory requirement will come down.

Moshe Orenbuch - Crédit Suisse AG

And the charter change you're referring to, that's in addition to the bank holding company, that's a separate...

Douglas Lowrey

They happen at the same -- they are separate, but they happen simultaneously. And the way to think about it is the FDIC and the DFI approve the bank's charter change, but they approve it contingent upon the Parent Company becoming a bank holding company. But it all happens on the same day.

Moshe Orenbuch - Crédit Suisse AG

And just very last thing on a different vein. The timeframe for the DTA actually converting to cash that you could distribute it, any sense as to -- forget the realization of it into book value, but what's the timeframe for actually converting it into cash?

John Delaney

Most of the DTA is now in the mid- to high-400s. Converting that to cash, that's a tax basis, so again, doing your forecast for bank earnings going out, I think bank pretax earnings this quarter were just under $50 million. So at a 40% tax rate, that's $20 million a quarter on this run rate. It's a pretty simple math for how that works.

Operator

The next question comes from John Stilmar of SunTrust.

John Stilmar - SunTrust Robinson Humphrey, Inc.

A quick question with regards to Parent liquidity. Clearly, you have some maturities coming up over the next 24 months, and you have some strategic options with regards to the debt, the $300 million senior secured. How much liquidity are you targeting at the Parent sort of over this timeframe and then sort of long term, whether it's an absolute dollar amount or a ratio? How should be thinking about that?

John Delaney

Well, I think, I believe, in past calls and this was a while ago, we mentioned a number of around $150 million was a good number for the Parent as a safety zone for liquidity. And obviously, we're significantly in excess of that now. I would say, how I view that today and going forward is that number is now less. And you can determine it by looking at a few factors. One, the unfunding committed to the Parent now are under $600 million, and they've come down significantly. And obviously, even as our operating expenses have come down some, the uses of cash are much less, so it becomes a situation where the Parent's use of cash is very predictable. So while we don't necessarily have an exact number to put out there, we do, do our internal stress test, something less than that $150 million that we would've talked about in the past is where I would think about that number.

John Stilmar - SunTrust Robinson Humphrey, Inc.

Perfect. And then maybe on a different vein with regards to the transition to become, or continuing growth of the bank as we ultimately look at what CapitalSource is going to be in the future. When we think about expenses, we've talked about the 2% ratio, and the need is to get a certain amount of operating leverage at the bank. But if we kind of put on an absolute dollar basis, can we revisit how or where we -- how we should start looking at where sort of a floor is in absolute dollars for total operating expenses? And then how much of that really is, to get to that 2% level, is going to be predicated on re-leveraging the expense base?

James Pieczynski

Yes, do you want to touch base on that? Or do you want me to take it?

Douglas Lowrey

I can start. We think a couple of things is, number one, the expense level to assets at the bank is very low today. Number two, a lot of the growth at the bank would be redeployment of the investment portfolio into loans, which will improve our net interest margin and our earnings but won't result in asset growth, so it won't help that expense ratio. As we bring these 2 companies together, 2 things will occur. One, there will be significant cost saves over the next couple of years, but there will be higher cost in the bank. And as we model that, we think that the target for the bank and the number we can achieve, including these additional cost saves, is in the 200 to 210 basis points level. So that's about as far as I can go. I don't have the dollars in front of me, maybe Don or Jim could pitch in.

James Pieczynski

Right. But I think -- so when we look at it, I think that expense base is kind of relatively fixed right now. Obviously, we would be moving in originators, which are now part of the loan sourcing fee. So I think we look at it on an absolute dollar level. We expect it to go up somewhat because of the movement of some expenses over to the Parent, but we also expect assets will happen -- will increase as a result of net loan growth, which will get us back to that roughly 2% to 2.10% that Tad was referring to.

John Delaney

And was the question focused just on bank? Or were you kind of going for consolidated also?

John Stilmar - SunTrust Robinson Humphrey, Inc.

Consolidated also, please.

John Delaney

So I think our consolidated, also, we've been running lately at sort of the 2.20% annual rate. There was some information there about how, this time, a little bit of the tick-up this quarter was professional fees. We mentioned that we've been using financial advisers to do this research, so that's a little bit of the excess there. I think our view is that, on an absolute basis, we can bring it down closer to the $200 million and slightly less before we start levering it back up. So again, not to put too fine a point on it, but within sort of the 10% range of that $200 million number, I think, we think, is achievable for us before we start growing back. Having said that, there are some things that cause OpEx to go up like greater originations and some of the things that are positive for overall income statement and capital deployment. So I think it could be higher if we have good opportunities. But I think we think there's some downward motion consolidated to the tune of what I just mentioned.

John Stilmar - SunTrust Robinson Humphrey, Inc.

Okay, perfect. And then addressing the commentary on one of your slides in which your net interest margin at the bank was just over 5%, but you expected it to go lower. Can you help us think about what the yield is? And I know quarter-to-quarter there's a certain amount of volatility, but over some relative -- maybe past 2 quarters or 3 quarters, what the blended average yield is on new originations or some other metric that you might be able to reference that gets me kind of close to that answer.

James Pieczynski

Yes, well, relative to new originations, and I've talked about that in the opening comments, but the average yield that we had on new originations in the quarter was 6.4%. That was on everything. If we just look at it, excluding multifamily and small-business lending which has preferred capital treatment but lower yields, the average rate on the rest of the portfolio was roughly 7%. So when you sit there and say, "What can we expect going forward?" I think that's a reasonable zone to be.

Operator

The next question comes from Scott Valentin of FBR Capital.

Scott Valentin - FBR Capital Markets & Co.

Real quick question. On the covenants within the senior notes, I think, it was buyback to limitations. Is there a dividend limitation as well? Does that count as well as a buyback?

John Delaney

They're basically the same. We do have a carve-out for the $0.01 a share we've been paying, so that doesn't count. But otherwise, dividends and buybacks are treated the same.

Scott Valentin - FBR Capital Markets & Co.

Okay. And then just going back to the level of liquidity at the Parent Company. You'd said lower over time, near-term, I think one of the rating agencies came out and I guess it moved you guys to stable. And I think in a note that I saw it said predicated upon maintaining about $350 million of

liquidity probably due to the notes coming due in 2013. So would it be, near-term, maintain more liquidity, and then longer term be able to come down below that $150 million level?

John Delaney

I think that's clearly true obviously because of the debt maturities we have outstanding, and we're now a year out from the $250 million. So yes, I think, near-term, the cash level will stay higher as long as the debt levels stay in place. But sort of the -- if you think about it sort of the net of debt as you look out, that's where you get to those lower numbers.

Scott Valentin - FBR Capital Markets & Co.

Okay. And a final question, just if you were to retire some of the senior notes and make-whole provision, depending how much you retire, of course, might cause a loss during the quarter. Would that impact the DTA utilization at all?

John Delaney

From an economic perspective, the answer is no. From a GAAP perspective, in terms of getting it back on the balance sheet, I think the way I've looked at that is, it's not a positive fact for us, but it's something that's a very discrete, understandable, explainable fact to the auditors such that it's either an expense we're paying today through the acceleration or an expense we're paying over the next 3 years through interest expense. So to me, it's a fairly clear discrete item that can be explained, so its negative impact should be minimized.

James Pieczynski

The impact to that would be negative in the quarter that, that would occur, but will be a positive impact in the future quarters because all of that interest would be eliminated.

John Delaney

Which is technically what you should be looking at in making the determination. The context of the answer to this question, which is a great question, is that the rules for determining when to do that are, I would describe them as not at all clear, right. So it is kind of this fact-based analysis. And the fact you're raising, one could argue, is a negative but, one could also argue, is a positive. So it's not clear how it all plays out with the other facts, but we remain fully confident in the ability to realize that asset, so...

Operator

The next question comes from Sameer Gokhale of KBW.

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

I guess most of my questions have been answered already. Not to harp again on that whole the capital return question, but just from a timing standpoint in reference to the previous question also. I mean, can we think of it as basically -- if you take out those high-yield notes, you'll have the hit to book value. So your preference would be, "Okay, let's get the DTA evaluation allowance removed first to get that back into book value." And once we have that in book value, then basically just after that, shortly thereafter, maybe ramp up on the return of capital, if you will, or the share buybacks. I mean, is it that simple as that basically? So sometime by the end of next year, if you get the DTA back, then you will basically get that opportunity to take out the high-yield notes and increase your capital return. Could we think of it that way?

John Delaney

I'll let Jim and then Don chime in on that. But I don't think that we're thinking of it that way. I think our priority is to return capital. We believe the tax asset is a good asset. The accounting chips will fall where the accounting chips fall on that.

Donald Cole

So yes, I mean, that's all I was going to say, John. I don't think we view that sort of recapture of the DTA asset on the balance sheet is relevant to the steps taken in the return of capital strategy.

John Delaney

Because the return of capital strategy clearly and tangibly creates shareholder value. The other thing is just a bit of optics at this point, because we do believe it is a real asset and one day they'll appear on our balance sheet as real asset.

James Pieczynski

You're right. And I think that the number will attract and look at very significantly as obviously the liquidity that we have. So selling off loans is going to result in cash proceeds that obviously provides cash for us to do more stock buybacks. The reversal of the DTA while increasing capital doesn't have an impact on liquidity. So we view it that the Parent is significantly overly capitalized already, and to move into that number doesn't change the way we look at it much, whereas the impact on liquidity is the more driving number.

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

Okay, that's helpful, yes. I mean, I was just trying to think of, sometimes optics do matter, so I thought maybe you were taking that into consideration, but I think your answer helps clarify that for me. The other question I had was basically looking at the originations of the cash flow loans within the bank, which have been pretty healthy. Just a couple of questions. I mean, from your commentary about the yield, it doesn't sound like there's much downward pressure on your yields on those cash flow loans. Maybe you can correct me if I'm wrong there. But in terms of yields and then deal structures, senior debt-to-EBITDA, if you could just provide some color there? And then also with respect to bank regulators and limitations on concentrations of certain kinds of loans, is there a number beyond which, or a percentage beyond which the regulators wouldn't want you to grow that cash flow portfolio?

James Pieczynski

Sure. Relative to the cash flow lending market out there, I think at the end of last year, we were seeing there would be a significant kind of level of competition on the cash flow side with spreads widening in a significant way. I think what we've seen this -- during the first 6 months of this year and particularly in the second quarter, is I think that stabilized more and where the structures are coming back in-line to something that we can consider to be attractive. Relative to the multiples, I would say, whereas a year ago the multiples in the leverage lending portfolio were probably at a 3x senior debt level, I think, on some of these we're seeing it migrate up closer to 4x, but still when it's all said and done, those cash flow loans are generally representing 40% of the total capital structure. So I think it's migrated up a little bit, but it's actually becoming -- once again becoming a more attractive space for us. And in terms of what percentage of loans can we be looking at, we always look at and we have internal metrics where we look at what our loans are as a percentage of our total regulatory capital. So when you sit there and look at what those percentages are, we're going to be looking at it relative to the roughly $1 billion of capital that we have there. And there's typically, for each of the asset classes, there's a percentage that we have as kind of our internally approved target. I don't know what it is off the top of my head for cash flow, but that's the way we look at it from a risk management perspective.

Douglas Lowrey

I could add to that as well, Sameer. On the bank concentrations, there are no published regulations, but we do look at concentrations across a number of fronts, including size, geography and asset class. But when you pick a particular asset class, like a lot of things, it matters what's in there, like all commercial real estate, for example, is not created equal. Multi-family and small business real estate look a lot different than a spec hotel loan. Cash flow is the same. A big portion of our security lending business is considered cash flow. Our new PPL business is considered cash flow. So not all cash flow loans are the leveraged, syndicated loans that you might be thinking about. And we are well within the -- there's no regulatory concern at the current point on concentration of cash flow loans or any of our concentrations.

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

That's helpful. And just one other question on your multifamily loans that you originated in the quarter. Was there any specific geographies that you targeted for those loans within the bank?

James Pieczynski

Yes, where we have the most comfort is in the Southern California area and up in the Northern California area. So I would say most of our multifamily lending, I would say, is centered in the Western U.S. and, more specifically, in California.

Operator

The next question comes from Steve Alexopoulos of JPMorgan.

Steven Alexopoulos - JP Morgan Chase & Co

Maybe I could start, looking at the little over $1 billion at the Parent, putting aside the constraints from the senior notes. How much capital is actually available today to return to shareholders? I know in your opening comments you said there was some constraints.

John Delaney

Well, you're saying ignore the constraints in the senior notes or include them?

Steven Alexopoulos - JP Morgan Chase & Co

No. If you put those aside, how much capital actually is there that you could return today if you did not have that one constraint? I mean, if that's the way you want it.

John Delaney

So just to -- I'll start framing it a little bit, and then, Don and Jim, you can provide more specifics. Clearly, we have debt due in a year. It looks like it's less than a year in terms of our convert so we would want to hold the liquidity for that. We have $700 million of loans, over $700 million of loans that we will be collecting all the cash on and just putting it in our coffers. So if your question's about liquidity, not capital, if you exclude the limitations in the senior notes, depending upon what you think the collections on these unencumbered loans will be across the next year or 2, I mean, we could have upwards of $1 billion of liquidity to return to shareholders, right?

James Pieczynski

And if you look at where we were today, right, and I guess this is kind of the simple way I look at it, is, after the payment of the converts that were due this July, there was roughly $900 million. If you sit there and say, "Okay, what do we know is ultimately coming due over the foreseeable future." We have our $250 million of our convert, including all the interest and everything associated with the high yield, would be another $400 million, which would give you $650 million, which gives you kind of 350 -- I'm sorry, $250 million of liquidity that's there and available now that we could use absent any future cash flows coming from the portfolio.

Donald Cole

Yes. I think, to sort of to put the point on both of what Jim and John said, when you say how much capital's available, we still look at this as a liquidity question because both are so ample and extraordinarily high at the Parent that, when you run them both, there's plenty of capital in all the scenarios. We do this because the capital is sustained there at the Parent. We're not losing -- we're not hemorrhaging money through reserves or anything like that. So it really is more palatable liquidity because we have so much capital at the Parent.

Steven Alexopoulos - JP Morgan Chase & Co

Okay, that's helpful. If you did prepay the senior secured notes, what would be the dollar reduction to capital from that? Do you have a ballpark number?

Donald Cole

Well, suppose if we wanted to redeem them today, the full make-whole -- and again...

John Delaney

So liquidity or capital?

Donald Cole

Well, capital, so it's the book value, right? The prepayment penalty, although I haven't looked at rates in the last day or 2, is probably somewhere in the $90 million to $100 million range. And that would be sort of accelerated prepaid interest being taken right now. And then we do have the original discounts that we're amortizing over 3 years. I think these went out at $94 million. It's like a 15 -- there's probably $15-or-so-million discounted, and there's some expenses hung up on the balance sheet too that's another $10 million to $15 million. So it's ahead of something north of $100 million.

Steven Alexopoulos - JP Morgan Chase & Co

Okay. Don, how are you thinking about the consolidated margin for the second half? Should it just continue to drift down from here?

Donald Cole

Well, look at --really, I would answer it by saying I don't really look at the consolidated margin that much. I think we focus on the bank margin. And I think it's -- we're still above 5%. We think that's there's obviously some things we've talked about -- downward pressure at the bank margin, but there's some things with mix that helped it. So I think staying in that 5% range is where we think about the bank. And on the Parent margins, they can get upside down. I think they might have actually been upside down this period just because we now have such high-cost debt with the shrinking portfolio. So the Parent, I just think of as being kind of chunky. I just repaid some converts, so I'll have some nice interest expense savings next time, which will help. But my portfolio will keep shrinking. So I kind of look at it as a tale of 2 cities, if you will. And the Parent will be a very thin same margin. The bank will be okay. And look, it could improve as the Parent becomes a lower percentage of that.

Steven Alexopoulos - JP Morgan Chase & Co

Okay. Just one final question on the DTA. I know you've said that capital return was your priority. But how does the strategy today impact the timing of getting the DTA back, in your mind? Is it in any chance a 2011 event? And would it be onetime? It would just come back into capital or be in increments?

Donald Cole

Once again, so when you say -- when you ask the question that way I assume what you're saying is on a GAAP basis. And so I don't think the pure idea of returning capital affects that. It's focused on profitability. So I don't think it changes. And obviously, we talked about if there's one of these prepayments that would cause a high-interest expense coming in, in one quarter, that's not positive. But again something, as John mentioned, shouldn't impact the decision quite so much under sort of the way the rules should work. But I don't think that this strategy change really changes our view as to when we think that would come back.

Operator

The next question comes from Mark DeVries of Barclays Capital.

Mark DeVries - Barclays Capital

Not to beat a dead horse on the DTA issue, but around the timing of the reversal of the allowance. Understanding that the terms are very ambiguous, my conceptual understanding is there's kind of a standard that you need to have a year or so of sustained profitability. If we look back now we see there's 5 straight quarters of GAAP earnings. One, is my understanding conceptually correct? And if so, is there like a standard run how robust those earnings have to be? Or is there a standard around that's to be both GAAP and tax profitable?

Donald Cole

Like I was saying -- your understanding on what's the standard is probably gives it a little more credit for being that concrete about the 3 or 4 quarters. But I don't think the standard is even that clear. I mean, the standard basically is supposed to be more likely than not your ability to use it. And so again, I would sit there and say from my view of an economic perspective is that standard is something we should meet. But the way the GAAP then defines that standard sort of creates different categories of evidence, one of which is this trailing 12-quarter profit and loss, which they put a lot of weight on, which we're still not in positive. But it's not dispositive, that one piece of evidence, and so the earnings create positive evidence. And so the longer it is obviously and the more robust or more significant it is, both from mostly, I think, from a GAAP, this is more of a GAAP discussion than it is a taxable earnings discussion, but basically from a GAAP perspective. And we've had this quarter, obviously our most significant level of pretax. But in other quarters have been significant, some not quite so significant. So I think where we weighted out and we have over the first half of this year is, we don't expect it to be before the end of this year, and I don't think we would change that statement. But I think it's probably still a pretty muddy standard.

Mark DeVries - Barclays Capital

I also had a question about your earlier comments about contemplating setting up a BDC. Is that any kind of indication that, I guess, that the bank regulators are frowning upon some of the cash flow base loans, particularly the ones that are further down the cap structure? Or was it just an opportunity to explore a more tax-efficient structure?

John Delaney

It is not a reflection on any view of our ability to make the kind of loans we want to make in the bank, including cash flow loans. What it was, was just, when we -- in embarking on this kind of very significant strategic decision, as it relates to what to do with the Parent's capital, we had straw man around a bunch of different ideas. And one of the ideas, as we disclosed earlier, that we spent time on, was whether we should dividend out the Parent into effectively a new company that would engage in a entirely different style of lending that is permissible in a bank, specifically mezzanine lending. So it would be effectively a new business, and that's one of the things we analyzed. And we determined that, that was not as attractive as what we're doing today. But it should not be viewed as a reflection that there are any limitations on the bank doing the kind of loans we want to do or that we have any concern with respect to the bank's ability to fund the type of business we want to make off this broad and diverse platform we have here. I don't know, Jim, if you want to...

James Pieczynski

No, I think that's that exactly it. I mean, I think we just view it as another complementary business to what we've been doing on the bank side. But when looking at that, we decided the path we're taking now is, quite frankly, the simpler and ultimately more effective way to do it.

John Delaney

Yes. It was an intellectually interesting kind of path, right, that we spent some time looking at. But we just determined, as Jim said, it was simpler and more effective and a more direct way to get value to the shareholders to do what we're doing today.

Operator

Our last question comes from Jeff Davis of Guggenheim.

Jeff Davis - Guggenheim Securities, LLC

Question for John or Tad. In terms of bank acquisitions that CapSource might look at, is there a prototypical bank that you may have in mind in terms of geography? Is it about funding and distribution? Is it about type of lending franchise? If you could just comment on that, on what you might be looking for?

John Delaney

Jeff, I'll start to allow Tad to formulate what will undoubtedly be a better answer. But in general, we've thought about any bank acquisitions, obviously from a geographic standpoint, and Tad can comment on that, but more from the profile of the company, we're a business lender, so it would be logical to think about bank acquisitions that brought some capability to bear that would allow for cross-selling opportunities to business customers. That would in general be a preference because there's probably a heck of a lot of banking that can be done with our borrowers that we're not able to access or provide right now, and you need infrastructure and plumbing to do that. So an acquisition that might have those capabilities, you could see how that would be a great synergy, more so than a consumer-oriented institution. Which doesn't mean we wouldn't consider that, but that's kind of a high level. But Tad, why don't you chime in?

Douglas Lowrey

Sure, sure. The California would be the primary area of focus, and we think there would be plenty of opportunity there, number one. Number two, the decisions that we've announced today, of course, puts that further into the future, so things could change. Number three, we think it would be healthy. A prototypical bank, as a you described, would be a healthy institution. But if you roll all that together, primarily what we would be interested in is a business banking platform.

Jeff Davis - Guggenheim Securities, LLC

And Tad, there are not, not many business banks are failing. And I guess we're talking about this at least 18 months in the future. But if we fast forward it to that point, would FDIC-assisted deals be of interest or are those too commercial real estate-focused, et cetera, too much under lease?

Douglas Lowrey

Well, we don't think they will exist 18 months out. And if they do, it kind of depends why they're troubled. If they're troubled because of commercial real estate, we have the ability to absorb that and work that out. So it's primarily not troubled versus healthy, it's more of the robust nature of the platform and the team that's managing that business banking platform.

John Delaney

That concludes our call. Thanks, everybody, for joining us.

Operator

Once again, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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